**Exhibit 10.45**

 

 

 

**SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT**

 

 

**DATED AS OF DECEMBER 17, 2004**

 

 

**BY AND BETWEEN**

 

 

**LOWRY DIGITAL IMAGES, INC.**

** **

**AND**

** **

**DIGITAL THEATER SYSTEMS, INC.**

 

 

 

----

 

**SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT**

** **

THISSECURED CONVERTIBLE NOTE PURCHASE AGREEMENT (this “**Agreement**”), dated as of December 17, 2004, by and betweenLOWRY DIGITAL IMAGES, INC., a California corporation (the “**Company**”) and DIGITAL THEATER SYSTEMS,INC., a Delaware corporation (“**DTS**”or the “**Purchaser**”).

 

TheCompany desires to sell to the Purchaser, and the Purchaser desire to purchasefrom the Company, a secured convertible promissory note in the aggregateprincipal amount of One Million Dollars ($1,000,000).

 

Inconsideration of the mutual promises herein made and in consideration of therepresentations, warranties, and covenants herein contained, the parties agreeas follows:

 

# **ARTICLE I DEFINITIONS**

# ** **

**1.1****                               DefinedTerms**.  As used herein, the termsbelow shall have the following meanings. Any of such terms, unless the context otherwise requires, may be used inthe singular or plural, depending upon the reference, unless the plural isdefined otherwise.

 

“Affiliate”shall have the meaning set forth in the Exchange Act.  Without limiting the foregoing, all directorsand officers of a Person that is a corporation and all managing members of aPerson that is a limited liability company shall be deemed to be Affiliates ofsuch Person for all purposes under this Agreement.

 

“Board”shall mean the Board of Directors of the Company.

 

“Business”shall mean all lines of business and all business activities of any kindcurrently or formerly conducted by the Company or any Predecessor Entity,including without limitation digital image processing.

 

“BusinessDay” means any day other than a Saturday, Sunday or legal holiday in theState of California.

 

“CERCLA”shall mean the United States Comprehensive Environmental Response, Compensationand Liability Act, 42 U.S.C. § 9601*et seq.*, asamended.

 

“Cleanup”shall mean any investigation, cleanup, removal, containment or otherremediation or response actions.

 

“Consent”shall mean any approval, consent, ratification, waiver, or other authorization(including, but not limited to, any Governmental Authorization and anyapproval, consent, ratification, waiver or other authorization required inorder to properly transfer any real property interest held by the Company).

 

“Contract”shall mean any agreement, contract, obligation, promise, or undertaking(whether written or oral) that is legally binding.

 

1

----

 

“Encumbrance”shall mean any charge, claim, community property interest, condition, equitableinterest, joint or co-ownership interest, Lien, option, pledge, securityinterest, right of first refusal or restriction of any kind, including anyrestriction on use, voting, transfer, receipt of income or exercise of anyother attribute of ownership, including but not limited to any covenant,condition, restriction, reservation, rights of way, easement or other titleEncumbrance or title exception affecting any property or asset.

 

“Environment”shall mean soil, soil gas, land surface or subsurface strata, surface waters(including navigable waters, ocean waters, streams, ponds, drainage basins andwetlands), groundwater, drinking water supply, stream sediments, ambient air(including indoor air), plant and animal life and any other environmentalmedium or natural resource.

 

“Environmental,Health and Safety Liabilities” shall mean any cost, damage, expense (includingbut not limited to attorneys’ and consultants’ fees), liability or obligationarising from or under any Environmental Law and consisting of or relating to:

 

### (a)                                  anyenvironmental, health or safety matters or conditions (including on-site oroff-site contamination, occupational safety and health and regulation ofchemical substances or products);

###  

### (b)                                 fines,penalties, judgments, awards, settlements, legal or administrative proceedingsoutcomes, damages, losses, claims, demands and response, investigative,remedial or inspection costs and expenses arising under any Environmental Law;

###  

### (c)                                  financialresponsibility under any Environmental Law for Cleanup costs or correctiveaction, including any Cleanup required by applicable Environmental Law (whetheror not such Cleanup has been required or requested by any Governmental Body orany other Person) and for any natural resource damages; or

###  

### (d)                                 anyother compliance, corrective, investigative or remedial measures required underany Environmental Law.

###  

### (e)                                  Theterms “removal,” “remedial” and “response action” include the types ofactivities covered by CERCLA.

###  

“EnvironmentalLaw” shall mean all Legal Requirements, and all rules, regulations orguidelines promulgated thereunder, relating to pollution or protection of humanhealth or the Environment, including, without limitation, (a) lawsrelating to the Release or threatened Release of Hazardous Materials or othersubstances into the Environment and (b) laws relating to theidentification, generation, manufacture, processing, distribution, use,treatment, storage, disposal, recovery, transport, transfer, refinement,production, management or other handling of Hazardous Materials or othersubstances.  Environmental Laws shallinclude, without limitation, CERCLA, the Federal Water Pollution Control Act(33 U.S.C. § 1251*et seq.*), RCRA, the SafeDrinking Water Act (21 U.S.C. § 349, 42 U.S.C. §§ 201, 300f), the ToxicSubstances Control Act (15 U.S.C. § 2601*et seq.*), theClean Air Act (42 U.S.C. § 7401*et seq.*), theCalifornia Health and Safety Code (§ 25100*et seq.*, §39000*et seq.*) as enacted prior to theClosing Date and as in effect on the Closing Date.

 

2

----

 

“EnvironmentalPermits” shall mean all licenses, permits, approvals, authorizations,consents, qualifications, registrations, privileges, waivers, or orders of, orfilings with, any Governmental Body, whether federal, state, municipal, localor foreign, required for the operation of the facilities under EnvironmentalLaws.

 

“ERISA”shall mean the Employee Retirement Income Security Act of 1974, as amended, orany successor law, and the rules and regulations promulgated thereunder.

 

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

 

“Facilities”shall mean any real property, leaseholds or other interests currently owned,held, occupied or operated by the Company and any buildings, plants, structuresor equipment (including motor vehicles, tank cars and rolling stock) currentlyowned or operated by the Company.

 

“FundedDebt” shall mean, as of the Closing Date, (a) all indebtedness of theCompany for borrowed money, including, without limitation, bank debt andamounts owed to DTS, (b) any other indebtedness of the Company whether ornot evidenced by a note, bond, debenture or similar instrument, (c) allobligations of the Company under capital leases, (d) all obligations ofthe Company in respect of letters of credit or similar instruments issued orcreated for the account of the Company, (e)  all obligations of theCompany with respect to delinquent Taxes, and (f) all accrued interest,any premiums payable or any other charges or penalties on any of theobligations set forth in clauses (a) through (e) above.  Funded Debt does not include amounts dueunder that certain lease, dated                    ,between the Company and GE Capital.

 

“GAAP”shall mean United States generally accepted accounting principles, consistentlyapplied.

 

“GovernmentalAuthorization” shall mean any approval, Consent, license, permit, waiver orother authorization issued, granted, given or otherwise made available by orunder the authority of any Governmental Body or pursuant to any LegalRequirement.

 

“GovernmentalBody” shall mean any:

 

#### (i)                                     nation,state, county, city, town, village, district or other jurisdiction of anynature;

####  

#### (ii)                                  federal,state, local, municipal, foreign or other government;

####  

#### (iii)                               governmentalor quasi-governmental authority of any nature (including any governmentalagency, branch, department, official or entity and any court or othertribunal);

####  

#### (iv)                              multi-nationalorganization or body; or

####  

#### (v)                                 bodyexercising, or entitled to exercise, any administrative, executive, judicial,legislative, police, regulatory or taxing authority or power of any nature.

 

3

----

 

“HazardousActivity” shall mean the distribution, generation, handling, importing,management, manufacturing, processing, distribution, production, refinement,Release, storage, transfer, transportation, treatment, disposal, recycling oruse (including any withdrawal or other use of groundwater) of HazardousMaterials in, on, under, about or from a Facility or any part thereof into theEnvironment.

 

“HazardousMaterials” shall mean any waste, chemical, material or other substance(whether solids, liquids or gases) that is listed, defined, designated orclassified as, or otherwise determined to be, hazardous, radioactive,infectious, reactive, corrosive, ignitable, flammable, toxic, or harmful tohuman health or the Environment, or a pollutant or a contaminant subject toregulation, control or remediation under any Environmental Law, including anymixture or solution thereof, and specifically including petroleum,polychlorinated biphenyls, radon gas, urea formaldehyde and asbestos orasbestos-containing materials.

 

“IntellectualProperty” shall mean any and all foreign and domestic (a) inventions(whether or not reduced to practice) and all improvements thereto, and allpatents, patent applications and patent disclosures related thereto, togetherwith all provisionals, reissuances, continuations, continuations-in-part,divisions, revisions, extensions and reexaminations thereof;(b) trademarks, service marks, trade dress, logos, brand names, tradenames, corporate names, domain names and 1-800, 1-888, 1-877 or other “vanity”telephone numbers, in each case, whether or not registered, including in allcases, all goodwill associated therewith, and all applications, registrationsand renewals in connection therewith; (c) works of authorship, allcopyrights (including rights of authorship and moral rights and derivativeworks thereof), whether or not registered, any and all website content,together with all translations, adaptations, derivations and combinationsthereof, and all applications, registrations and renewals in connectiontherewith; (d) trade secrets and confidential business information(including research and development, know-how, formulae, compositions,manufacturing and production processes and techniques, technical data, designs,drawings, specifications, research records, records of inventions, testinformation, customer and supplier lists and identities, pricing and costinformation, and business and marketing plans and proposals); (e) sourcecode and object code versions of computer software (including data and relateddocumentation); (f) copies and tangible embodiments of the items set forthin clauses (a) through (e) hereof (in whatever form or medium), and(g) claims or causes of actions arising out of or related to anyinfringement or misappropriation of any of the foregoing items set forth inclauses (a) through (e).

 

“IRC”shall mean the Internal Revenue Code of 1986, as amended, or any successor law,and the rules and regulations promulgated thereunder.

 

“IRS”shall mean the Internal Revenue Service, a division of the United StatesTreasury Department, or any successor agency.

 

“LegalRequirement” shall mean any federal, state, local, municipal, foreign,international, multinational or other administrative order, judicial order,court judgment, arbitration award, executive order, constitution, law,ordinance, policy, regulation, statute or treaty.

 

4

----

 

“Liability”shall mean any direct or indirect liability, indebtedness, obligation,commitment, claim, deficiency, expense, deferred income, guaranty orendorsement of or by any Person of any type, whether known, unknown, accrued,absolute, contingent, matured or unmatured.

 

“Lien”shall mean any mortgage, deed of trust, pledge, hypothecation, securityinterest, lien or charge of any kind.

 

“MaterialAdverse Effect” or “Material Adverse Change” shall mean, withrespect to any party hereto, any material adverse effect or change in thefinancial condition, results of operations, liabilities, operations, businessor assets of such party and its Subsidiaries, taken as a whole, or on theability of such party or its shareholders or stockholders, as the case may be,to consummate the transactions contemplated by this Agreement or the Note orany event or condition which would reasonably be expected to, with the passageof time, constitute a Material Adverse Effect or Material Adverse Change.

 

“Order”shall mean any award, decision, injunction, judgment, order, ruling, subpoenaor verdict entered, issued, made or rendered by any court, administrativeagency or other Governmental Body or by any arbitrator.

 

“OrdinaryCourse of Business” shall describe any action taken by a Person if suchaction is consistent with the past practices of such Person and is taken in theordinary course of the normal day-to-day operations of such Person.

 

“OrganizationalDocuments” shall mean, as applicable, (a) the articles or certificateof incorporation, all certificates of determination and designation, and thebylaws of a corporation; (b) the partnership agreement and any statementof partnership of a general partnership; (c) the limited partnershipagreement and the certificate or articles of limited partnership of a limitedpartnership; (d) the operating agreement, limited liability companyagreement and the certificate or articles of organization or formation of alimited liability company; (e) any charter or similar document adopted orfiled in connection with the creation, formation or organization of a Person;and (f) any amendment to any of the foregoing.

 

“OtherBenefit Obligations” shall mean all obligations, arrangements or customarypractices to provide compensation or benefits, other than salary or wages, ascompensation for services rendered, to present or former directors oremployees, other than obligations, arrangements and practices that arePlans.  Other Benefit Obligationsinclude, without limitation, employment agreements, consulting agreements underwhich the compensation paid does not depend upon the amount of servicerendered, vacation policies, severance payment plans, arrangements or policiesand fringe benefits within the meaning of IRC § 132.

 

“PermittedLiens” means (i) statutory liens for current Taxes or othergovernmental charges not yet due and payable as of the Closing Date or theamount or validity of which is being contested in good faith by appropriateproceedings by the Company and for which appropriate reserves have beenestablished in accordance with GAAP; (ii) mechanics’, carriers’, workers’,repairers’ and similar statutory liens arising or incurred in the OrdinaryCourse of Business for amounts which are not delinquent as of the Closing Dateand which are not,

 

5

----

 

individually or in the aggregate, significant;(iii) zoning, entitlement, building and other land use regulations imposedby governmental agencies having jurisdiction over the real property subject toLeases which are not violated by the current use and operation of the realproperty subject to Leases; (iv) covenants, conditions, restrictions,easements and other similar matters of record affecting title to the realproperty subject to Leases or any other matter affecting title to the realproperty subject to Leases which does not, individually or in the aggregate,materially impair the ownership, occupancy or use of the real property subjectto Leases for the purposes for which it is currently owned, used or proposed tobe used in connection with the Company’s Business; (v) Encumbrances infavor of DTS or any of its Affiliates and (vi) Liens set forth on Schedule 2.1hereto.

 

“Person”shall mean any individual, corporation (including any non-profit corporation),general or limited partnership, limited liability company, joint venture,estate, trust, association, or other entity or Governmental Body.

 

“Plan”shall have the meaning set forth in ERISA § 3(3).

 

“PredecessorEntity” shall mean any person or entity, other than the Company, throughwhich the Business was operated, including, without limitation, a soleproprietorship, partnership, limited liability company or corporation.

 

“Proceeding”shall mean any action, arbitration, audit, hearing, investigation, litigationor suit (whether civil, criminal, administrative or investigative) commenced,brought, conducted by or against any Person or heard by or before, or otherwiseinvolving, any Governmental Body or arbitrator.

 

“RCRA”shall mean the Resource Conservation and Recovery Act, 42 U.S.C. § 6901*et seq.*, as amended.

 

“Release”shall mean and include any spilling, leaking, pumping, pouring, injecting,emitting, emptying, discharging, depositing, escaping, leaching, migrating(including passive migration), dumping, disposing or other releasing into theEnvironment or the workplace, whether intentional or unintentional andotherwise defined in any Environmental Law.

 

“Representative”shall mean any officer, director, principal, attorney, agent or otherrepresentative.

 

“SecuritiesAct” shall mean the Securities Act of 1933, as amended, and the rules andregulations promulgated thereunder.

 

“Subsidiary”shall mean, with respect to any Person (for the purposes of this definitiononly, the “Owner”), any corporation or other Person of which securitiesor other interests having the power to elect a majority of that corporation’sor other Person’s board of directors or similar governing body, or otherwisehaving the power to direct the business and policies of that corporation orother Person (other than securities or other interests having such power onlyupon the happening of a contingency that has not occurred) are held by theOwner or one or more of its Subsidiaries.

 

6

----

 

“Tax”shall mean any federal, state, local or foreign income, gross receipts,license, payroll, employment, excise, severance, stamp, occupation, premium,windfall profits, environmental, customs duties, capital stock, franchise, profits,withholding, social security, unemployment, disability, real property, personalproperty, escheat, sales, use, transfer, registration, value added, alternativeor add-on minimum, estimated, or other tax of any kind whatsoever, includingany interest, penalty, or addition thereto, whether disputed or not.

 

“TaxReturn” means any return, declaration, report, claim for refund, orinformation return or statement relating to Taxes, including any schedule orattachment thereto, and including any amendment thereof.

 

# **ARTICLE IIAUTHORIZATION AND SALE OF THE NOTE**

# ** **

**2.1****                               Authorization.**

 

Subjectto the terms and conditions hereof, the Company has authorized the issuance andsale of a secured convertible promissory note in the aggregate principal amountof One Million Dollars ($1,000,000), substantially in the form attached heretoas Exhibit A (the “**Note**”),to the Purchaser.

 

**2.2****                               TheClosing of the Sale of the Note.**

 

### (a)                                  Simultaneouslywith the execution and delivery of this Agreement, the closing hereunder (the “**Closing**”) with respect to the issuance,sale and delivery of the Note shall take place (the date on which the Closingoccurs, the “**Closing Date**”).

###  

### (b)                                 Atthe Closing, on the terms and subject to the conditions contained herein, (i)the Company shall issue, sell and deliver to the Purchaser, and the Purchasershall purchase from the Company, the Note, and (ii) the Purchaser shall deliverto the Company, by wire transfer of immediately available funds to an accountdesignated by the Company, the aggregate purchase price of One Million Dollars($1,000,000) (the “**Purchase Price**”)for the Note.

###  

**2.3****                               Useof Proceeds.**

 

TheCompany will use the proceeds of the Note purchased by the Purchaser pursuantto this Agreement as set forth on Schedule 2.3 attached hereto.

 

**2.4****                               Security.**

 

TheCompany’s obligations under the Note and this Agreement will be secured by allof the Collateral as described in that certain Security Agreement, dated as ofJune 2, 2004, between the Company and the Purchaser (the “**Security Agreement**”), and will be pledgedby all of the shares of stock of the Company owned by John Lowry pursuant tothat certain Stock Pledge Agreement dated as of June 2, 2004 by John Lowry infavor of the Purchaser (the “**Stock Pledge**

 

7

----

 

**Agreement**”).  The Purchaser agrees and acknowledges thatthe consummation of the transactions contemplated hereby shall not in and ofthemselves be deemed to be a breach of the Stock Pledge Agreement or theSecurity Agreement.

 

**2.5****                               Interest.**

 

Interestshall accrue on the unpaid principal balance of the Note (such unpaid principalbalance is referred to as the “**OutstandingBalance**”) at the rate of six percent (6%) per annum, commencing onthe date of issuance of the Note and compounding monthly.  Subject to the provisions of Section 2.9hereof, accrued interest shall be due and payable in cash at the time theCompany pays the Outstanding Balance of the Note.  The Outstanding Balance shall be subject toincrease as set forth in the last sentence of Article VII hereof.

 

**2.6****                               Term.**

 

Subjectto Section 2.9 hereof, the Note is due and payable (a) on December 16,2005 (the “**Maturity Date**”); or (b)on demand by written notice following the occurrence of an Event of Default (asdefined in Article VII).  Subjectto the provisions of Section 2.9 hereof, the Company shall, on theMaturity Date or, if earlier, within one (1) Business Day of receipt of thewritten notice referred to in the immediately preceding sentence (the “**Payment Date**”), pay the Outstanding Balance,together with all accrued and unpaid interest on the Note as of the MaturityDate or the Payment Date, as applicable, as well as all other amounts payablethereon.  All payments shall be appliedfirst to accrued interest and other amounts payable thereon, and thereafter toprincipal.

 

**2.7****                               Methodof Payment.**

 

Allpayments hereunder shall be made to the Purchaser at its address as set forthin Section 8.5 hereof, or at such other place as the Purchaser shalldesignate to the Company in writing.  Ifany payment of principal or interest on the Note is due on a day which is not aBusiness Day, such payment shall be due on the next succeeding Business Day.

 

**2.8****                               NoUsury.**

 

TheCompany represents and warrants that this Agreement and the Note are herebyexpressly limited so that in no event whatsoever, whether by reason ofdeferment or advancement of loan proceeds, acceleration of maturity of the loanevidenced hereby, or otherwise, shall the amount paid or agreed to be paid tothe Purchaser hereunder for the loan, use, forbearance or detention of moneyexceed the maximum interest rate permitted by the laws of the State ofCalifornia.  If at any time theperformance of any provision hereof or the Note involves a payment exceedingthe limit of the price that may be validly charged for the loan, use,forbearance or detention of money under applicable law, then automatically andretroactively, ipso facto, the obligation to be performed shall be reduced tosuch limit, it being the specific intent of the Company and the Purchaserhereof that all payments under this Agreement or the Note are to be creditedfirst to interest as permitted by law, but not in excess of (i) the agreed rateof interest set forth in the Note, or (ii) that permitted by law, whichever isthe lesser, and the balance toward the reduction of principal.  The provisions of this Section 2.8shall never be superseded or waived and shall control every other provision ofthis Agreement and the Note.

 

8

----

 

**2.9****                              ****Conversion.**

 

TheOutstanding Balance and all unpaid interest accrued on the Note shall besubject to conversion as set forth in the Note. The Company shall not be obligated to issue certificates evidencing theshares issuable upon conversion of the Note unless the Note is either deliveredto the Company or the Purchaser notifies the Company that the Note has beenlost, stolen or destroyed and executes an agreement reasonably satisfactory tothe Company to indemnify the Company from any loss incurred by it in connectionwith the Note.  The right to conversionset forth in the Note shall be personal to Purchaser, and neither such rightnor any interest therein may be assigned or transferred by Purchaser, exceptfor transfer or assignments to Purchaser’s Affiliates.

 

# **ARTICLE IIITHE CLOSING**

# ** **

**3.1****                               Deliveriesat the Closing.**

 

### (a)                                  Atthe Closing, the Company shall deliver to the Purchaser:

###  

#### (i)                                     theNote, duly executed by the Company and representing the aggregate principalamount of One Million Dollars ($1,000,000);

####  

#### (ii)                                  acertificate of the Secretary of the Company dated as of the Closing Date,certifying: (A) the Company’s Articles of Incorporation and Bylaws, as ineffect on the date hereof, as true and complete and attaching certified copiesof same; (B) as to the incumbency and genuineness of the specimen signatures ofeach officer of the Company executing this Agreement and the Note; (C) theresolutions of the Board authorizing the execution, delivery and performance ofthis Agreement and the Note and the consummation of the transactionscontemplated thereby and thereby, as true and complete and attaching copies ofsame (including but not limited to the issuance of the Note); and (D) that allconsents, approvals and other actions of, and notices and filings with, allentities and persons as may be necessary or required with respect to theexecution by the parties of the transactions contemplated hereby, have beenobtained or made; and

####  

#### (iii)                               agood standing certificate, as of a date not more than five (5) days prior tothe Closing Date, issued by the Secretary of State of the State of California.

####  

### (b)                                 Atthe Closing, the Purchaser shall deliver to the Company the Purchase Price forthe Note.

###  

# **ARTICLE IVREPRESENTATIONS AND WARRANTIES OF THE COMPANY**

# ** **

As amaterial inducement to the Purchaser to enter into and perform its obligationsunder this Agreement, the Company makes the following representations andwarranties to the Purchaser, which representations and warranties shall betrue, correct and complete in all respects as of each of the date hereof andthe Closing Date:

 

9

----

 

**4.1****                               Organizationand Good Standing**.  The Companyis duly organized, validly existing, and in good standing under the laws of theState of California, with full corporate power and authority to own, license,operate or lease its assets and conduct its Business.  The Company is not required to be qualifiedto do business as a foreign corporation under the laws of any otherjurisdiction.  The copies of the Company’sarticles of incorporation and bylaws which have been delivered to DTS areaccurate, correct and complete as of the date hereof.

 

**4.2****                               Authorization;Power; Valid and Binding Agreement; No Breach.**

 

### (a)                                  Eachof this Agreement and the Note has been duly authorized, executed and deliveredby the Company.

###  

### (b)                                 TheCompany has all requisite power and authority to execute and deliver thisAgreement and the Note and to perform its obligations under this Agreement andthe Note and the transactions contemplated herein and therein.

###  

### (c)                                  Eachof this Agreement and the Note constitutes a valid and binding obligation ofthe Company, enforceable in accordance with its terms, except as enforceabilitymay be limited by bankruptcy laws, other similar laws affecting creditors’rights and general principles of equity affecting the availability of specificperformance and other equitable remedies.

###  

### (d)                                 Theauthorization, issuance (or reservation for issuance), sale and delivery of theNote and any equity securities issuable upon conversion of the Note (the “**Conversion Securities**”), has beenauthorized by all requisite action of both the Board and the stockholders ofthe Company (the “**Stockholders**”).  The Conversion Securities issuable uponconversion of the Note, when issued in accordance with the Note, will bevalidly issued and outstanding, fully paid and nonassessable, free and clear ofany Liens whatsoever and with no restrictions on the voting rights thereof andother incidents of record and beneficial ownership pertaining thereto, exceptas set forth in this Agreement.

###  

### (e)                                  Theexecution, delivery and performance of this Agreement and the Note by theCompany and the consummation of the transactions contemplated hereby andthereby do not conflict with or result in any material breach of, constitute amaterial default under, result in a material violation of, result in thecreation of any material lien, security interest, charge or encumbrance uponany material assets of the Company, or require any material authorization,consent, approval, exemption or other action by or notice to any court, othergovernmental body or third party, under the provisions of the Company’sarticles of incorporation or bylaws or any material indenture, mortgage, lease,loan agreement or other material agreement or instrument to which the Companyis bound, or any law, statute, rule or regulation or order, judgment or decreeto which the Company is subject, including but not limited to the breach of anyusury or similar law or regulation relating to interest charges (without givingeffect to the application of Section 2.8 or 8.12).

###  

**4.3****                               Capitalization.**

 

### (a)                                  Ownership.  The authorized capital of the Companyconsists solely of 10,000,000 shares of common stock, without par value, ofwhich 2,526,526 shares are issued and

 

10

----

 

### outstanding.  All of the outstanding shares of CompanyStock are owned by the Stockholders and are duly authorized, validly issued,fully paid and non-assessable.  Except asset forth in Schedule 4.3(a)-1, other than this Agreement, thereare no Contracts relating to the issuance, sale or transfer of any shares ofcapital stock or other securities of the Company.  Other than this Agreement, there are nooutstanding subscriptions, calls, commitments, warrants or options for thepurchase of shares of any capital stock or other securities of the Company orany securities convertible into or exchangeable for shares of capital stock orother securities issued by the Company, or any other commitments of any kindfor the issuance of additional shares of capital stock or other securitiesissued by the Company.  There are nooutstanding or authorized stock appreciation, phantom stock, profit participation,or similar rights with respect to the Company. Schedule 4.3(a)-2 sets forth a true and complete list of theStockholders and their respective ownership of the issued and outstandingshares of common stock, no par value, of the Company (the “**Company Stock**”).  All of the outstanding shares of capitalstock of the Company have been offered, issued and sold by the Company incompliance with applicable federal and state securities laws.

###  

### (b)                                 NoSubsidiaries.  The Company does notown or have any direct or indirect stock or other equity or ownership interest(whether controlling or not), or any Contract to acquire any such interest, inany corporation, association, partnership, joint venture or other entity.

###  

**4.4****                               FinancialStatements**.  The Company hasdelivered to DTS:

 

### (a)                                  unauditedbalance sheets of the Company as of each of December 31, 2003 andMarch 31, June 30 and September 30, 2004 and the respectiverelated unaudited statements of income for each of the three-month periods thenended; and

###  

### (b)                                 anunaudited balance sheet of the Company as of November 30, 2004 (the “BalanceSheet”), and the related unaudited statement of income for theeleven (11) month period then ended (collectively, with the materialsdescribed in clause (a), the “Financial Statements”).  The Financial Statements fairly andaccurately present the financial condition and the results of operations,income, expenses, assets and liabilities of the Company in all materialrespects as of the respective dates of, and for the periods referred to in, theFinancial Statements, all in accordance with GAAP consistent with the pastpractices of the Company, subject to matters set forth in the notes thereto andin the case of interim statements to normal year-end adjustments, whichadjustments, individually or in the aggregate, are not material.  No financial statements of any Person otherthan the Company are required by GAAP to be included in the FinancialStatements.

###  

**4.5****                               Booksand Records. **The books ofaccount, minute books, stock record books, and other records of the Company, allof which have been made available to DTS, are complete and correct in allmaterial respects, and, with respect to the books of account, fairly andaccurately reflect the income, expenses, assets and liabilities of the Companyin all material respects.

 

**4.6****                               Titleto Properties; Encumbrances. **TheCompany owns all the properties and assets that it purports to own free andclear of Encumbrances, except for Permitted Liens and

 

11

----

 

such Encumbrances and landlord liens which arise in the Ordinary Courseof Business and do not materially impair the Company’s ownership or use of suchproperty or assets.  The Company does notown any real property.  Schedule 4.6contains a complete and accurate list of all real property leases, subleases,use and occupancy agreements to which the Company is a party to or which areused by the Company in the operation of its Business (collectively, “Leases”).  All such Leases are legal, valid and bindingobligations of the Company and in full force and effect, subject to properauthorization and execution of such Leases by the other party thereto and theapplication of any bankruptcy or other creditor’s rights laws.  The Company is in compliance with all of thematerial terms and conditions of such Leases, and to the knowledge of the Company,there are no material disputes, defaults, oral agreements or forbearances ineffect as to any such Leases.  The assetsof the Company set forth in the Balance Sheet and the properties owned, licensedor leased by the Company as of the date hereof and disclosed to DTS are all theassets and properties required to conduct the Business of the Company.

 

**4.7****                               Conditionand Sufficiency of Assets**.  Theequipment of the Company is in such operating condition and repair as isrequired to operate the Business of the Company in the manner in which theBusiness is being operated as of the Closing. The building, plants, structures and equipment of the Company areadequate for the uses to which they are being put, and none of such buildings,plants, structures and equipment of the Company is in need of maintenance orrepairs except for ordinary, routine maintenance and repairs that are notmaterial in nature or cost.  The buildings,plants, structures, and equipment of the Company are sufficient for thecontinued conduct of the Business of the Company after the Closing insubstantially the same manner as conducted prior to the Closing.  

 

**4.8****                               NoUndisclosed Liabilities**.  Exceptas set forth in Schedule 4.8, the Company has no liabilities orobligations of any kind, whether absolute, accrued, contingent or otherwise,except for liabilities or obligations reflected in the Balance Sheet andcurrent liabilities in the Ordinary Course of Business since the date of the BalanceSheet.

 

**4.9****                               Taxes. **Except as set forth in Schedule 4.9:

 

### (a)                                  TheCompany and each Predecessor Entity has duly and timely filed or will duly andtimely file (or caused or will cause to be filed) with the appropriate taxingauthorities all Tax Returns required to be filed (without regard to extensionsof time to file) on or before the Closing Date. All such Tax Returns are or will be complete and accurate in allrespects as filed.  No claim has everbeen made in writing or otherwise to the knowledge of the Company or anyPredecessor Entity by a Tax authority in a jurisdiction where the Company or aPredecessor Entity, as the case may be, does not pay tax or file Tax Returnsthat it is subject to taxation by that jurisdiction or required to file returnsin that jurisdiction.  Neither theCompany nor any Predecessor Entity has requested or been granted any extensionof time for the filing of any Tax Return.

###  

### (b)                                 AllTaxes owed by the Company or any Predecessor Entity or for which the Company ora Predecessor Entity may be held liable (whether or not shown on any TaxReturn) which were or will be due on or prior to the Closing Date have been orwill be paid in full.  The unpaid Taxesof the Company and any Predecessor Entity as of the date of the Financial Statementsdo not exceed the reserve for Tax Liability (excluding any reserve for

 

12

----

 

### deferred Taxesestablished to reflect timing differences between book and Tax income) setforth on the face of the Balance Sheet (rather than in any notes thereto).  Since the date of the Balance Sheet, neitherthe Company nor any Predecessor Entity has incurred any material Liability forTaxes outside the Ordinary Course of Business and consistent with priorreporting practices.  There are nooutstanding refund claims with respect to any Tax or Tax Return of the Companyor any Predecessor Entity.

###  

### (c)                                  Nomaterial deficiencies for Taxes have been claimed, proposed or assessed by anytaxing or other governmental authority against the Company or any PredecessorEntity.  There are no pending audits,investigations, disputes or claims or other actions for or relating to anyLiability of the Company or any Predecessor Entity for Taxes, nor is theCompany or its officers or directors aware of any information which has causedor should cause them to believe that an audit by any Tax authority may beforthcoming.  The Company has deliveredto DTS complete and accurate copies of federal, state and local Tax Returns ofthe Company and any predecessors for all tax periods ended December 31,2003 (the “Delivered Tax Returns”), and has delivered or made availableto DTS all relevant documents and information with respect thereto, includingwithout limitation work papers, records, examination reports, and statements ofdeficiencies proposed, assessed against or agreed to by the Company.  The Company has delivered to DTS complete andaccurate copies of all examination reports and statements of deficiencies assessedagainst or agreed to by the Company or any Predecessor Entity sinceDecember 31, 1998.  Neither theCompany nor any of its predecessors has waived any statute of limitations inrespect of Taxes or agreed to any extension of time with respect to a Taxassessment or deficiency.  No power ofattorney granted by the Company with respect to any Taxes is currently inforce.  All elections with respect toTaxes affecting the Company that were not made in the Delivered Tax Returns aredescribed in Schedule 4.9.

###  

### (d)                                 Setforth in Schedule 4.9 are the net operating loss, net capital loss,credit, minimum Tax, charitable contribution, and other Tax carryforwards (bytype of carryforward and expiration date, if any) of the Company.

###  

### (e)                                  TheCompany and each Predecessor Entity has withheld and paid all Taxes required tohave been withheld and paid in connection with amounts paid or owing to anyemployee, independent contractor, creditor, stockholder, or other third party.

###  

### (f)                                    Tothe Company’s knowledge, all persons who have purchased shares of the Company’sstock that at the time of such purchase were subject to a substantial risk offorfeiture under Section 83 of the IRC have timely filed elections underSection 83(b) of the IRC and any analogous provisions of applicable stateand local Tax Laws.

###  

### (g)                                 Thereare no Encumbrances for Taxes (other than for current Taxes not yet due andpayable) on any of the assets of the Company or any of the Company’s capitalstock.

###  

### (h)                                 TheCompany is not and has never been an S corporation for federal or anystate income tax purposes.

 

13

----

 

### (i)                                     TheCompany has not consented at any time under former IRC §341(f)(1) (orcomparable provisions of state, local or foreign law) to have the provisions offormer IRC §341(f)(2) apply to any disposition of any of its assets.

###  

### (j)                                     TheCompany has not agreed and will not be required to make any adjustment underIRC §481(a) (or comparable provisions of state, local or foreign law) by reasonof a change in accounting method or otherwise occurring prior to the ClosingDate for any period ending on or after the Closing Date.

###  

### (k)                                  TheCompany is not obligated to make any payments, and is not a party to anyagreement that under certain circumstances could obligate it to make anypayments that will not be deductible under IRC §162 or §280G.

###  

### (l)                                     TheCompany is not and has never been a United States real property holdingcorporation within the meaning of IRC §897(c)(2).

###  

### (m)                               TheCompany does not have a permanent establishment in any country with which theUnited States of America has a relevant Tax treaty, as defined in such relevantTax treaty, and does not otherwise operate or conduct business through anybranch in any country other than the United States.

###  

### (n)                                 TheCompany is not and has not at any time, been a member of an affiliated group ofcorporations within the meaning of IRC §1504 or any group that has filed acombined, consolidated or unitary Tax Return. The Company has no Liability for the Taxes of any Person (other than theCompany) (i) under Treasury Regulations §1.1502-6 (or any similarprovision of state, local or foreign law), (ii) as a transferee orsuccessor, (iii) by contract, or (iv) otherwise.

###  

### (o)                                 Thereis not and has never been a party to any agreement for the sharing of Tax Liabilitiesor similar arrangements (including indemnity arrangements) with respect to orinvolving the Company or any of its assets or Business.

###  

### (p)                                 Tothe knowledge of the Company, other than Ian Caven, none of the Stockholders isa “foreign person” as defined in IRC §1445(f)(3).  The Company has withheld and paid all Taxesrequired to have been withheld and paid in connection with amounts paid orowing to any employee, independent contractor, creditor, stockholder or otherthird party.

###  

### (q)                                 TheCompany has not entered into any transaction identified as a “listedtransaction” for purposes of Treasury Regulations §§1.6011-4(b)(2) or 301.6111-2(b)(2).

###  

### (r)                                    TheCompany has not distributed the stock of any corporation in a transactionsatisfying the requirements of IRC §355, and the stock of the Company has notbeen distributed in a transaction satisfying the requirements of IRC §355.

###  

### (s)                                  Exceptas set forth on Schedule 4.9, the Company is not currently and willnot become in the future, liable for tax liability in any jurisdiction based onthe operation of any Predecessor Entity.

 

14

----

 

**4.10****                        NoMaterial Adverse Change.** Sincethe date of the Balance Sheet, there has not been, individually or in theaggregate, any Material Adverse Change of the Company.

 

**4.11****                        EmployeeBenefits.**

 

### (a)                                  Schedule 4.11(a)contains a complete and accurate list of all Other Benefit Obligations of theCompany.  The Company does not currentlyhave, nor has it ever had in place, any Plans.

###  

### (b)                                 TheCompany has delivered or made available to DTS.

###  

##### (i) allmaterial summaries and descriptions furnished to participants and beneficiariesregarding the Other Benefit Obligations of the Company for which a plandescription or summary plan description is not required; and

#####  

##### (ii) allemployee handbooks of the Company.

#####  

### (c)

###  

##### (i) TheCompany has performed in all material respects all of its obligations under theOther Benefit Obligations currently sponsored, maintained or contributed to bythe Company or with respect to which the Company has an obligation tocontribute.  The Company has madeappropriate entries in its financial records and statements, to the extentrequired under GAAP, for all obligations and liabilities under such OtherBenefit Obligations that have accrued but are not due.

#####  

##### (ii) TheCompany, with respect to all of its Other Benefit Obligations is, and suchOther Benefit Obligation is, to the extent applicable, in compliance in allmaterial respects any applicable Legal Requirements.

#####  

##### (iii) The Companyhas not engaged in any transaction in violation of ERISA §§404 or 406 or anynon-exempt “prohibited transaction,” as defined in IRC §4975(c)(1), or hasotherwise violated the provisions of Part 4 of Title I,Subtitle B of ERISA.

#####  

##### (iv) Otherthan claims for benefits submitted in the ordinary course by participants orbeneficiaries, no claim against, or legal proceeding involving, any OtherBenefit Obligation of the Company, is pending, or to the knowledge of theCompany, threatened.

#####  

##### (v) Except tothe extent required under ERISA §601*et seq.* andIRC §4980B, the Company does not provide health or welfare benefits for anyretired or former employee and is not obligated to provide health or welfarebenefits to any active employee following such employee’s retirement or othertermination of service.

#####  

##### (vi) TheCompany has complied in all material respects with the provisions of ERISA §601*et seq.* and IRC §4980B.

#####  

##### (vii) TheCompany is not a party to any agreement, Contract, arrangement or plan that hasresulted or could reasonable be expected to result, separately or in theaggregate,

 

15

----

 

##### in the payment of any “excess parachutepayments” within the meaning of IRC §280G as a result of the transactionscontemplated by this Agreement.  Nopayment that is owed or may become due to any director, officer, employee oragent of the Company as a result of the transactions contemplated by thisAgreement will be non-deductible to the Company (or its successor) or subject toTax under IRC §280G or §4999; nor will the Company (or its successor) berequired to “gross up” or otherwise compensate any such Person because of theimposition of any excise Tax on a payment to such Person as a result of thetransactions contemplated by this Agreement.

#####  

##### (viii) TheCompany does not maintain, contribute to have any obligation to contribute toany employee benefit plan, program, policy, arrangement or agreement withrespect to employees employed outside the United States.

#####  

**4.12****                        Compliancewith Legal Requirements.**

 

### (a)                                  TheCompany is in compliance with all Legal Requirements applicable to the Companyor the conduct of the Business, except where failure to comply would not have aMaterial Adverse Effect.

###  

### (b)                                 TheCompany holds and is in compliance with, and Schedule 4.12(b) setsforth, all material governmental qualifications, registrations, filings,privileges, franchises, licenses, permits, approvals or authorizations(collectively, the “Licenses”) necessary for the conduct and operationof the Business.

###  

**4.13****                        Absenceof Proceedings.**

 

### (a)                                  Exceptas set forth in Schedule 4.13(a), there are no Proceedings:

###  

##### (i) pendingor, to the Company’s knowledge, threatened by or against the Company or thatrelate to the Business and there is no reasonable basis therefor; or

#####  

##### (ii) thatchallenge, or that may have the effect of preventing, delaying, making illegalor otherwise interfering with, the transactions contemplated hereby, and, tothe Company’s knowledge, no such Proceedings have been threatened.

#####  

### (b)                                 TheCompany is not subject to any Order.

###  

**4.14****                        Absenceof Certain Changes and Events. **Exceptas set forth in Schedule 4.14, as expressly contemplated by thisAgreement, or with respect to agreements with DTS, since the date of theBalance Sheet there has not been any:

 

### (a)                                  (i) changein authorized or issued capital stock of the Company; (ii) grant of anystock option or right to purchase shares of capital stock of the Company;(iii) issuance of any security convertible into such capital stock;(iv) grant of any registration rights; (v) purchase, redemption,retirement or other acquisition by the Company of any shares of any suchcapital stock; or (vi) declaration or payment of any dividend or otherdistribution or payment in respect of such shares of capital stock;

###  

### (b)                                 amendmentto the Organizational Documents of the Company;

 

16

----

 

### (c)                                  increaseby the Company of any bonuses, salaries or other compensation (includingmanagement or other similar fees) to any shareholder, director, officer orentry into any employment, consulting agreement, severance or similar Contractwith any director, officer or employee;

###  

### (d)                                 adoptionof, or increase in the payments to or benefits under, any profit sharing,bonus, deferred compensation, savings, insurance, pension, retirement,severance or other employee benefit plan for or with any of the employees ofthe Company or any increase in the payment to or benefits under any Plan orOther Benefit Obligation for or with any employees of the Company, other thanincreases provided under such Plan or Other Benefit Obligation in the OrdinaryCourse of Business;

###  

### (e)                                  damageto or destruction or loss of or unforeseen diminution in value of any materialasset or property owned or used by the Company, whether or not covered byinsurance;

###  

### (f)                                    entryinto, termination, non-renewal, or acceleration of, or receipt of notice oftermination or non-renewal by the Company of (i) any license,manufacturing, supply, distributorship, dealer, sales representative, jointventure, credit or similar agreement or (ii) any Contract or transactioninvolving a Liability by or to the Company of at least $10,000;

###  

### (g)                                 saleor license (other than sales or license in the Ordinary Course of Business),lease or other disposition of any asset or property of the Company;

###  

### (h)                                 mortgage,pledge or imposition of any Encumbrance or other Lien, except for PermittedLiens, on any asset or property of the Company, including the sale, lease,license out or other disposition or material diminution in value of any of itsIntellectual Property outside the Ordinary Course of Business;

###  

### (i)                                     failureto repay when due any obligation, including without limitation, accountspayable and accrued expenses;

###  

### (j)                                     accrualof any material expenses, except for such accruals in the Ordinary Course ofBusiness;

###  

### (k)                                  capitalexpenditures in excess of $10,000;

###  

### (l)                                     cancellationor waiver of any claims or rights with a value to the Company in excess of$10,000;

###  

### (m)                               payment,discharge or satisfaction of any material Liability by the Company, other thanthe payment, discharge or satisfaction of Liabilities in the Ordinary Course ofBusiness;

###  

### (n)                                 incurrenceof or increase in, any material Liability of the Company, except in theOrdinary Course of Business, or any accelerated or deferred payment of orfailure to pay when due, any Liability;

 

17

----

 

### (o)                                 changein the accounting methods used by the Company;

###  

### (p)                                 electionmade or changed, agreement by the Company with respect to Tax allocation, Taxsharing or Tax indemnity, waiver of a statute of limitations with respect toTaxes of the Company or settlement or compromise any claim notice, auditreport, assessment or Liability for Taxes of the Company; or

###  

### (q)                                 agreement,whether oral or written, by the Company with respect to or to do any of theforegoing.

###  

**4.15****                        Contracts;No Defaults.**

 

### (a)                                  Exceptas set forth in Schedule 4.15, the Company is not party toany:  (i) agreement relating to anybusiness acquisition by or of the Company within the last two years,(ii) collective bargaining agreement or Contract with any labor union,(iii) bonus, pension, profit sharing, retirement or other form of deferredcompensation plan, written or oral, other than as described in Section 4.11hereof or the schedules relating thereto, (iv) stock purchase, stockoption or similar plan, (v)  contract for the employment of any officer,individual employee or other individual on a full time or consulting basis,written or oral, (vi) agreement or indenture relating to the borrowing ofmoney or to mortgaging, pledging or otherwise placing a lien on any portion ofthe Company’s assets, (vii) guaranty of any obligation for borrowed moneyor other guaranty, (viii) lease or agreement under which it is lessee of,or holds or operates any personal property owned by any other party, for whichthe annual rental exceeds $10,000, (ix) lease or agreement under which itis lessor of or permits any third party to hold or operate any property, realor personal, for which the annual rental exceeds $10,000, (x) Contract orgroup of related contracts with the same party for the purchase of products orservices, under which the undelivered balance of such products and services hasa selling price in excess of $10,000 (other than purchase orders entered intoin the Ordinary Course of Business), (xi) Contract or group of relatedcontracts with the same party for the sale of products or services under whichthe undelivered balance of such products or services has a sales price inexcess of $10,000 (other than purchase orders entered into in the OrdinaryCourse of Business), (xii) Contract which prohibits the Company fromfreely engaging in business anywhere in the world, (xiii) Contract with aremaining term of in excess of 12 months which Contract can not be terminatedby the Company without Liability on notice of 30 days or less, (xiv) agreement,joint venture or other business arrangement with IMAX Corporation or anyAffiliate thereof, or (xv) agreement containing “most favored nations” or otherprovisions requiring adjustment of cost, pricing, priority or other terms orconditions of the contract, or performance obligations under such contract, inrelation to (A) the terms or conditions of other contracts of the Company or(B) the price or other terms or conditions for the provisions of similarservices by a third party.

###  

### (b)                                 DTSeither has been supplied with, or has been given access to, a true and correctcopy of all written Contracts which are referred to on Schedule 4.15,together with all material amendments, waivers or other changes thereto.

###  

### (c)                                  TheCompany is not in default under any Contract listed on Schedule 4.15.

 

18

----

 

### (d)                                 Theproducts licensed, sold, leased and delivered and all services provided by theCompany and any Predecessor Entity have conformed in all material respects withall applicable contractual commitments and all express and implied warranties,and the Company has no liability (whether known or unknown, whether asserted orunasserted, whether absolute or contingent, whether liquidated orun-liquidated, and whether due or to become due) for replacement ormodification thereof or other damages in connection therewith other than in theaggregate amount not exceeding $50,000.

###  

### (e)                                  Norate reduction is required under Section 2(b)(1) of that certain Agreement forServices-Restoration Services effective as of November 1, 2003, by and betweenthe Company and Walt Disney Pictures and Television (the “Disney Agreement”).  No notification has been delivered (or isrequired to be delivered) by the Company pursuant to Section 2(b)(2) of theDisney Agreement.

###  

**4.16****                        Insurance. **Schedule 4.16 contains acomplete list of, and the Company has made available to DTS true and completecopies of, all insurance policies covering the Company or any of its employees,directors or officers.  There is no claimby the Company pending under any of such policies as to which coverage has beendenied by the underwriters of such policies. The Company is in compliance inall material respects with the terms and conditions of all such policies.

 

**4.17****                        EnvironmentalMatters.**

 

### (a)                                  Tothe knowledge of the Company, the Company is in compliance with, and is not inviolation of or liable under, any Environmental Law.  The Company has not received, any writtennotice (including but not limited to notices of violations, demands, citations,directives, inquiries, Consent decrees, judgments, Orders or Liens) from(i) any Governmental Body or third party or (ii) the current or priorowner or operator of its Facilities, relating to any Hazardous Activity,Hazardous Material, any actual or potential violation or failure to comply withany Environmental Law, or any actual, potential or threatened obligation toundertake or bear the cost of any Environmental, Health and Safety Liabilitieswith respect to (A) any of the Facilities or any other properties orassets (whether real, personal or mixed) in which the Company (or anypredecessor) has had an interest, or (B) with respect to any property orFacility at, to or from which Hazardous Materials were generated, manufactured,refined, transferred, imported, used, processed, transported, treated, stored,handled, transferred, disposed, recycled or received by the Company (or anypredecessor) or any other Person for whose conduct the Company is responsible.

###  

### (b)                                 Tothe knowledge of the Company, there are no presently existing claims,Encumbrances or other restrictions of any nature (including but not limited tonotices of violations, demands, citations, directives, inquiries, consentdecrees, judgments, Orders or Liens), resulting from any Environmental, Healthand Safety Liabilities or arising under or pursuant to any Environmental Law,with respect to or affecting any of the Facilities or any other properties andassets (whether real, personal or mixed) in which the Company (or anypredecessor) has or had an interest.

 

19

----

 

### (c)                                  Tothe knowledge of the Company, there are no Hazardous Materials present on or atthe Facilities including any Hazardous Materials contained in barrels, above orunderground storage tanks, landfills, land deposits, dumps, equipment (whethermoveable or fixed) or other containers, either temporary or permanent, anddeposited or located in land, water, dumps or any other part of the Facilities,or incorporated into any structure therein or thereon in violation ofEnvironmental Law, except for such violations that would not have a MaterialAdverse Effect.  To the knowledge of theCompany, the Company has not permitted or conducted, or is aware of, anyHazardous Activity at its Facilities or any other properties or assets (whetherreal, personal or mixed) in which the Company has or had an interest.

###  

### (d)                                 Tothe knowledge of the Company, there has been no Release of any HazardousMaterials at, to or from its Facilities in violation of Environmental Law or aswould give rise to liability under Environmental Law.

###  

### (e)                                  Tothe knowledge of the Company, the Company and its Facilities have allEnvironmental Permits required under any Environmental Law, except for suchEnvironmental Permits the failure to obtain would not have a Material AdverseEffect, and the Company and each of its Facilities is in compliance with allsuch Environmental Permits, except for such noncompliance that would not have aMaterial Adverse Effect.

###  

### (f)                                    TheCompany has delivered to DTS true, complete and correct copies and results ofany material environmental reports, studies, analyses, recommendations, audits,assessments, tests or monitoring possessed or initiated by the Companypertaining to the Environment, Hazardous Materials or Hazardous Activities in,on or under its Facilities or concerning compliance by the Company, or anyother Person for whose conduct it is responsible, with Environmental Laws, tothe extent the foregoing are in the possession custody or control of theCompany.

 

20

----

 

**4.18****                        EmployeeMatters. **There has not been withrespect to the Company, and the Company has not been notified in writing of anypresently pending or existing, and, to the knowledge of the Company, there isnot threatened, (a) any strike, slowdown, picketing, work stoppage orlock-out, (b) any material Proceeding against the Company relating to thealleged violation of any Legal Requirement pertaining to labor relations oremployment matters, including any charge or complaint filed by an Employee orunion with the National Labor Relations Board, the Equal Employment OpportunityCommission or any comparable Governmental Body, organizational activity orother labor or employment dispute against the Company or (c) anyapplication for certification of a collective bargaining agent.  There is no lockout of any employees by theCompany, and no such action is currently contemplated by the Company.  The Company has complied with all materialLegal Requirements relating to employment, equal employment opportunity, nondiscrimination,disability accommodation, immigration, wages, hours, benefits, collectivebargaining, the payment of social security and similar Taxes, occupationalsafety and health, and plant closing.  Tothe knowledge of the Company, no director, officer, or other key employee orconsultant of the Company intends to terminate his employment or engagementwith the Company.  Except as set forth inSchedule 4.18, the Company has fully satisfied all of its payrollobligations as and when due.

 

**4.19****                        IntellectualProperty.**

 

### (a)                                  TheCompany owns all Intellectual Property necessary or required for the conduct ofits Business as currently conducted or as proposed to be conducted.  Schedule 4.19 sets forth a trueand complete list of all Intellectual Property owned by the Company, in whichthe Company has any rights, or which is otherwise used by the Company in theconduct of its Business (collectively, the “Company IP Rights”).

###  

### (b)                                 TheCompany IP Rights are free and clear of all claims or Encumbrances, except asmay be specifically identified in Schedule 4.19.  The Company does not own any registrations ofits trademarks or service marks, nor has it ever filed any applications forfederal, foreign or state registration of its marks.  The Company does not own any domain names.

###  

### (c)                                  Thereis no pending or threatened opposition, interference or cancellation proceedingbefore any court or registration authority in any jurisdiction against anyIntellectual Property owned by the Company.

###  

### (d)                                 TheCompany is not a party to any agreements pertaining to the use of, or grantingany right to use or practice any rights under, any Intellectual Property,whether the Company is the licensee or licensor thereunder, and whether writtenor oral, express or implied, nor is the Company a party to any writtensettlements or Consents relating to any Intellectual Property or covenants notto sue.  Except as may be set forth in Schedule 4.19,there are no settlements, Consents, judgments, or orders or other agreementswhich restrict any of the Company’s rights to use any Intellectual Property orwhich permit third parties to use any Intellectual Property which wouldotherwise infringe any of the Company IP Rights. The Company has never licensedto any third party any Intellectual Property.

###  

### (e)                                  TheCompany takes and has taken reasonable measures to protect the confidentialityof its trade secrets, know-how or other confidential information material toits

 

21

----

 

### business ascurrently operated or planned to be operated (together, “Trade Secrets”).  To the best of the Company’s knowledge, nomaterial or significant Trade Secret has been disclosed or authorized to bedisclosed to any third party, including any employee, agent, contractor orother person, other than pursuant to a written non-disclosure agreement (orother written agreement or employment policy imposing non-disclosureobligations) that adequately protects the Company’s proprietary interests inand to such Trade Secrets.  To the bestof the Company’s knowledge, no party to any non-disclosure agreement relatingto any Trade Secrets is in breach thereof.

###  

### (f)                                    Exceptas set forth in Schedule 4.19, the conduct of the Business of theCompany as currently conducted or planned to be conducted does not infringeupon (either directly or indirectly) any Intellectual Property owned orcontrolled by any third party.  There areno claims or suits pending or, to the best of the Company’s knowledge,threatened, and the Company has not received any notice from any third party(i) alleging that any of the Company’s activities or the conduct of itsBusiness has infringed upon or constitutes the unauthorized use of theIntellectual Property rights of any third party, or (ii) challenging theownership, use, validity or enforceability of any Company IP Rights.

###  

### (g)                                 Tothe best of the Company’s knowledge, no third party is misappropriating,infringing, diluting, or violating any of the Company IP Rights, and no suchclaims are pending against a third party by the Company.

###  

### (h)                                 Schedule 4.19lists all material computer programs and computer databases, other thanoff-the-shelf applications, which are owned or otherwise used by the Company (“CompanySoftware”).  There is no Softwarecurrently or previously, or contemplated to be, licensed, sublicensed or soldto or by the Company.  “Software” meansany and all (i) computer programs, including any and all softwareimplementations of algorithms, models and methodologies, whether in source codeor object code, (ii) computer databases and computer compilations,including any and all data and collections of data, whether machine readable orotherwise, (iii) descriptions, flow-charts and other work product used todesign, plan, organize and develop any of the foregoing, (iv) any DomainNames and the technology supporting and content contained on any Internetsite(s), and (v) all documentation, including user manuals and trainingmaterials, relating to any of the foregoing.

###  

### (i)                                     Eachitem of Software listed in Schedule 4.19 is either (i) ownedby the Company, or (ii) currently in the public domain or otherwiseavailable to the Company without the license, lease or Consent of any thirdparty.  Except as set forth in Schedule4.19, to the best of the Company’s knowledge, the Company’s use of theSoftware set forth in Schedule 4.19 does not violate the rights ofany third party.  With respect to theSoftware set forth in Schedule 4.19 which the Company purports toown, such Software was either developed by (x) employees of the Companywithin the scope of their employment; or (y) independent contractors whohave assigned their rights to the Company and waived any moral rights in favorof the Company pursuant to written agreements. The Company Software generally functions in the manner intended, free ofany significant bugs or programming errors.

###  

### (j)                                     TheCompany has never distributed to any third party any of the Company Software,and no such distribution is presently contemplated by the Company.  The Company has taken all actions customaryin the software industry to document the Company Software and

 

22

----

 

### its operation,such that the Company Software, including the source code and documentation,have been written in a clear and professional manner so that they may beunderstood, modified and maintained in an efficient manner by reasonablycompetent programmers.  To the best ofthe Company’s knowledge, the Company has not exported or transmitted anyCompany Software to any country to which such export or transmission isrestricted by any applicable U.S. or foreign regulation or statute, withoutfirst having obtained all necessary and applicable U.S. or foreign governmentlicenses or permits.  To the best of theCompany’s knowledge, the components manufactured by the Company and used in theCompany’s products including any Company Software, are free of any undisclosedprogram routine, device, or other feature, including, without limitation, atime bomb, software lock, drop-dead device, or malicious logic or, as of thetime of each delivery, any virus, worm or trojan horse, that is designed todelete, disable, deactivate, interfere with, or otherwise harm them (a “DisablingCode”), and any virus or other intentionally created, undocumentedcontaminant (a “Contaminant”), that may, or may be used to, access,modify, delete, damage or disable any hardware, system or data or that mayresult in damage thereto.  The componentsobtained from third party suppliers are, to the best knowledge of the Company,free of any Disabling Codes or Contaminants that may, or may be used to,access, modify, delete, damage or disable any hardware, system or data or thatmight result in damage thereto.  To thebest of the Company’s knowledge, the Company’s hardware, systems and data arefree from Disabling Codes and Contaminants. The Company Software does not contain any open source, copyleft orcommunity source code, including any libraries or code licensed under theGeneral Public License, Lesser General Public License or any other licensearrangement obliging the Company to make source code publicly available,whether or not approved by the Open Source Initiative.

###  

### (k)                                  Allemployees and consultants of the Company and any Predecessor Entity, whetherformer or current, have entered into valid and binding agreements with theCompany sufficient to vest title in the Company of all rights in anyIntellectual Property created by such employee or consultant in the scope ofhis or her services or employment for the Company or the Predecessor Entity, asthe case may be.

###  

### (l)                                     Tothe extent that any Company IP Rights have been developed or created by a thirdparty for the Company or a Predecessor Entity, the Company has a writtenagreement with such third party thereto and the Company thereby has obtainedownership of and is the exclusive owner of all such third party’s rights in anyIntellectual Property related to the Company’s IP Rights by operation oflaw or by valid assignment, to the fullest extent legally possible to do so.

 

23

----

 

**4.20****                        Relationshipswith Related Parties.** Except asset forth in Schedule 4.20, neither the Company nor, to the Company’sknowledge, any of its Affiliates owns (of record or as a beneficial owner) anequity interest or any other financial or profit interest in, a Person that hashad business dealings or a financial interest in any transaction with theCompany, other than business dealings or transactions conducted in the OrdinaryCourse of Business with the Company at substantially prevailing market pricesand on substantially prevailing market terms. Except as set forth in Schedule 4.20,no Affiliate of the Company is a party to any Contract with, or has any claimor right against, the Company.

 

**4.21****                        Customersand Suppliers**.  Schedule 4.21contains a complete and accurate list of each sole source supplier and the tenlargest suppliers and ten largest customers of the Company (based upon dollarsbilled by the Company), during the first 10 months of 2004, showing theapproximate total billings by the Company from each such customer during suchfiscal year.  Since the date of theBalance Sheet, there has been no material adverse change in the businessrelationship of the Company with any of its suppliers or customers named in Schedule 4.21or required to be named therein.

 

**4.22****                        Brokersand Finders**.  The Company has notincurred any obligation or Liability for brokerage or finders’ fees or agents’commissions or other similar payment with respect to the transactionscontemplated by this Agreement.

 

**4.23****                        Restrictionson Business Activities**.  There isno agreement (not to compete or otherwise), commitment, judgment, injunction,order or decree to which the Company, any Predecessor Entity or any Stockholderis a party relating to the Business or otherwise binding upon the Company orthe Business which has or may have the effect of prohibiting or impairing thetransactions contemplated by this Agreement, any business practice of theBusiness, any acquisition of property (tangible or intangible) by the Businessor the conduct of the Business.  None ofthe Company, any Stockholder or any Predecessor Entity has entered into anyagreement under which the operations of the Business are restricted or whichplaces any restrictions upon the Company with respect to selling or licensingany of its products or providing services to customers or potential customersor any class of customers, in any geographic area, during any period of time orin any segment of the market.

 

**4.24****                        Assignmentof Interests**.  Each Stockholderand each Predecessor Entity has assigned any and all interests they may have inany assets (tangible or intangible) relating to the Business to the Company.

 

**4.25****                        FullDisclosure**.  No representation orwarranty in this Article IV (as modified by the schedules hereto) or inany document delivered by the Company or its Representatives pursuant to thetransactions contemplated by this Agreement, contains any untrue statement of amaterial fact, or omits to state a material fact necessary to make thestatement herein or therein, in light of the circumstances under which theywere made, not misleading.

 

**4.26****                        OtherAgreements**.  Each of the SecurityAgreement and the Pledge Agreement remain in full force and effect, and neitherthe Company nor John Lowry is in breach of any of the terms thereof.

 

24

----

 

**4.27****                        FundedDebt**.  Schedule 4.26 listsall Funded Debt of the Company outstanding as of the Closing Date.

 

# **ARTICLE VREPRESENTATIONS AND WARRANTIES OF THE PURCHASER**

# ** **

As amaterial inducement to the Company to enter into and perform its obligationsunder this Agreement, the Purchaser makes the following representations andwarranties to the Company, which representations and warranties shall be true,correct and complete in all material respects as of the date hereof and theClosing Date.

 

**5.1****                               Authority.**

 

ThePurchaser has full power and authority to enter into and to perform thisAgreement in accordance with its terms and to consummate the transactionscontemplated hereby.  This Agreement hasbeen executed and delivered by the Purchaser and constitutes the valid andbinding obligation of the Purchaser enforceable in accordance with its terms.  The execution and performance of the transactionscontemplated by this Agreement and the Note and compliance with theirprovisions by the Purchaser: (i) to the Purchaser’s knowledge will not violateany provision of Law applicable to the Purchaser; and (ii) will not conflictwith or result in any breach of any of the Material terms, conditions orprovisions of, or constitute a default under the Purchaser’s Certificate ofIncorporation, or any indenture, lease, agreement or other instrument to whichthe Purchaser is a party or by which it or any of its properties is bound, orany decree, judgment, order, statute, rule or regulation applicable to thePurchaser.

 

**5.2****                               Experience.**

 

ThePurchaser is an “accredited investor” within the meaning of Regulation Dpromulgated by the Securities and Exchange Commission under the Securities Actand, by virtue of its experience in evaluating and investing in privateplacement transactions of securities in companies similar to the Company, thePurchaser is capable of evaluating the merits and risks of its investment inthe Company and has the capacity to protect its own interests.

 

**5.3****                               Investment.**

 

ThePurchaser has not been formed solely for the purpose of making this investmentand is acquiring the Note for investment for its own account, not as a nomineeor agent, and not with the view to, or for resale in connection with, anydistribution of any part thereof.  ThePurchaser understands that the Note and the Conversion Securities to beacquired have not been registered under the Securities Act or applicable stateand other securities laws by reason of a specific exemption from theregistration provisions of the Securities Act and applicable state and othersecurities laws, the availability of which depends upon, among other things,the bona fide nature of the investment intent and the accuracy of the Purchaser’srepresentations as expressed herein.

 

**5.4****                               Brokersor Finders.**

 

ThePurchaser has not retained any investment banker, broker or finder inconnection with the purchase of the Note. The Purchaser will indemnify and hold the Company harmless

 

25

----

 

against any liability, settlement or expense arisingout of, or in connection with, any claim by any such investment banker, brokeror finder.

 

**5.5****                               SharesNot Registered.**

 

Anyshares acquired by the Purchaser upon the execution of the Purchaser’s right ofconversion set forth in the Note (“**Shares**”) willnot be registered under the Securities Act, by reason of a specific exemptionfrom the Securities Act, and all Shares must be held indefinitely, unless theyare subsequently registered under the Securities Act or the Purchaser satisfiescertain other requirements under the Securities Act.  The Purchaser understands that these restrictionsare in addition to the contractual restrictions on transfer of Shares set forthin this Agreement.  The Purchaser isaware of the adoption of Rule 144 by the Securities and Exchange Commissionunder the Securities Act.  The Purchaserunderstands that the conditions for resale set forth in Rule 144 have not beensatisfied and that the Company is under no obligation to satisfy theseconditions.

 

# **ARTICLE VIADDITIONAL AGREEMENTS**

# ** **

**6.1****                               Applicationof Proceeds.**

 

Uponreceipt of the proceeds of the Note, the Company will immediately apply suchproceeds as set forth on Schedule 2.3.

 

**6.2****                               Paymentof Amounts Due Under the Note.**

 

TheCompany will timely pay any principal and interest due as well as any otheramounts payable under the Note in accordance with its terms and conditions.

 

**6.3****                               Reservationof Securities.**

 

TheCompany shall reserve, for the life of the Note, such securities as thePurchaser is entitled to receive upon conversion of the Note.  Prior to the issuance of any equitysecurities (or any instrument exercisable for or convertible into equitysecurities) and whenever otherwise required, the Company will amend itsArticles of Incorporation and take any such other action as is necessary toensure that there is a sufficient quantity of such equity securities into whichthe Note can be converted.  Such equitysecurities shall, when issued and delivered in accordance with terms of theNote, be duly and validly issued, fully paid and non-assessable.

 

**6.4****                               Survivalof Representations, Warranties and Agreements, Etc.**

 

Allrepresentations and warranties hereunder shall survive the Closing, and shallterminate upon repayment or conversion of the Note.  Except as otherwise provided herein, allagreements and/or covenants contained herein shall survive indefinitely until,by their respective terms, they are no longer operative.

 

26

----

 

**6.5****                               LegalFees and Expenses and Taxes.**

 

Eachparty shall pay all of its expenses in connection with the negotiation andexecution of this Agreement, the Note, and the consummation of the transactionscontemplated hereby and thereby.

 

**6.6****                               Filingof a UCC-1 Financing Statement.**

 

On theday on which the Closing occurs, the Company shall file a UCC-1 financingstatement with the Secretary of State of the State of California in order toperfect its lien on the collateral covered by the Security Agreement, in theform approved by the Purchaser.

 

**6.7****                               Restrictionson Transfer of Shares.**

 

### (a)                                  ThePurchaser shall not, directly or indirectly, sell, assign, make any short saleof, loan, hypothecate, pledge, offer, grant or sell any option or othercontract for the purchase of, purchase any option or other contract for thesale of, or otherwise dispose of or transfer, or agree to engage in any of theforegoing, any Shares, nor shall any Shares be made subject to sale underexecution, attachment, levy or similar process or otherwise be transferred,whether voluntarily or involuntarily or by operation of law or otherwise (eachof the foregoing being referred to as a “**Transfer**”).  Any Transfer of Shares shall be void, and theCompany shall not be required for any purpose whatsoever to recognize anyTransfer.  In the event of thedeclaration of a stock dividend, the declaration of an extraordinary dividendpayable in a form other than stock, a recapitalization, a spin-off, a stocksplit, an adjustment in conversion ratio, a recapitalization, areclassification or another similar event that affects the Company’soutstanding securities without receipt of consideration, any new, substitutedor additional securities or other property (including money paid other than asan ordinary cash dividend) that by reason of such event are distributed withrespect to any Shares or into which Shares as a result become convertible shallimmediately be subject to the restrictions set forth in this paragraph.

###  

### (b)                                 Notwithstandingthe immediately preceding paragraph, the Purchaser may sell Shares to a thirdparty if the Purchaser first offers the Company the right to purchase suchShares in the manner required by this paragraph.  If the Purchaser wishes to sell Shares, thePurchaser shall notify the Company in writing (a “**TransferNotice**”) describing the material terms of the proposed transfer,including the number of Shares proposed to be transferred, the proposedtransfer price, and the name and address of the proposed transferee. TheCompany shall have the right (the Company’s “**PurchaseRight**”) to purchase all, but not less than all, the Shares subjectto the Transfer Notice on the terms described in the Transfer Notice, bydelivering to the Purchaser, within 30 days after receiving the TransferNotice, notice of exercise of the Company’s Purchase Right.  The Company may assign its Purchase Rights toany Person.  If the Company does notexercise its Purchase Right within the aforementioned time period, thePurchaser may, not later than 90 days after the Company receives the TransferNotice, consummate a sale of such Shares on the terms and conditions describedin the Transfer Notice.  To be valid,however, (i) the sale shall not cause the violation of any federal or statesecurities laws and, if required by the Company, the Purchaser shall providethe Company with an opinion of counsel satisfactory to the Company to thateffect; and (ii) the transferee must agree, in a writing approved by theCompany, to be bound by all provisions of this Section 6.7 with respect

 

27

----

 

### to the Sharestransferred.  Any proposed sale on termsand conditions materially different from those described in the TransferNotice, and any subsequent proposed sale by the Purchaser, shall again besubject to the Company’s Purchase Right. If the Company exercises its Purchase Right, the Purchaser and theCompany shall consummate the sale of the Shares on the terms set forth in theTransfer Notice within 60 days after the Company receives the Transfer Notice(or within such longer period if specified in the Transfer Notice); provided,however, that if the Transfer Notice provided that the payment for the Shares wasto be made in a form other than cash or cash equivalent paid at the time oftransfer, the Company shall have the option of paying for the Shares with cashor cash equivalent equal to the present value of the consideration described inthe Transfer Notice.

###  

### (c)                                  Notwithstandingthe foregoing, the Purchaser may Transfer Shares to any of its Affiliateswithout complying with any of the provisions of this Section 6.7, solong as the transferee agrees in writing to be bound by all of the provisionsof this Section 6.7.

###  

# **ARTICLE VIIEVENTS OF DEFAULT**

# ** **

If anEvent of Default (as defined below) occurs, the Purchaser may, by notice to theCompany, declare the Outstanding Balance on the Note, together with any accruedbut unpaid interest thereon and all other amounts payable thereon, to beimmediately due and payable.  The Companywill give the Purchaser written notice of the occurrence of an Event of Defaultpromptly (setting forth in reasonable detail all of the facts related thereto)and in any event no later than five (5) Business Days after the Company hasknowledge of the occurrence of any such event.

 

Forpurposes of this Agreement, an “Event of Default” is any of thefollowing occurrences:

 

### (a)                                  TheCompany shall fail to pay the Outstanding Balance and all accrued but unpaidinterest and all other amounts payable thereon on the Note on the MaturityDate; or

###  

### (b)                                 Asof January 31, 2005, the Company and each of the Stockholders shall not haveentered into an agreement of merger with DTS on terms and conditions reasonablysatisfactory to DTS; or

###  

### (c)                                  Ifthe Company shall default (as principal or guarantor or other surety) in thepayment of any principal of or premium or interest on any Funded Debt which isoutstanding in a principal amount of at least Five Thousand Dollars ($5,000) inthe aggregate (other than the Note), or if any event shall occur or conditionshall exist in respect of any such Funded Debt or under any evidence of anysuch Funded Debt or of any mortgage, indenture or other agreement relatingthereto which would permit or shall have caused the acceleration of the paymentof such Funded Debt, and such default, event or condition shall continue formore than the period of grace, if any, specified therein and shall not havebeen waived pursuant thereto (other than Funded Debt in default as of theClosing Date as set forth on Schedule 8 hereto); or

###  

### (d)                                 TheCompany shall be involved in financial difficulties, but solely as evidenced(i) by its commencement of a voluntary case under Title 11 of the United States

 

28

----

 

### Bankruptcy Code asfrom time to time in effect, or by its authorizing, by appropriate proceedingsof its Board or other pleading admitting or failing to deny the materialallegations of a petition filed against it commencing an involuntary case undersaid Title 11, or seeking, consenting to or acquiescing in the relief thereinprovided, or by its failing to controvert timely the material allegations ofany such petition, (ii) by the entry of an order for relief in any involuntarycase commenced under said Title 11, (iii) by its seeking relief as a debtorunder any applicable law, other than said Title 11, of any jurisdictionrelating to the liquidation or reorganization of debtors or to the modificationor alteration of the rights of creditors, or by its consenting to oracquiescing in such relief, (iv) by the entry of an order by a court ofcompetent jurisdiction (A) finding it to be bankrupt or insolvent, (B) orderingor approving its liquidation, reorganization or any modification or alterationof the rights of its creditors, or (C) assuming custody of, or appointing areceiver or other custodian for, all or a substantial part of its property, or(v) by its making an assignment for the benefit of, or entering into acomposition with, its creditors, or appointing or consenting to the appointmentof a receiver or other custodian for all or a substantial part of its property;or

###  

### (e)                                  Ifthere shall exist final judgments against the Company aggregating in excess of$50,000 and if any one of such judgments or such judgments shall have beenoutstanding for any period of forty-five (45) days or more from the date of itsentry and shall not have been discharged in full or stayed pending appeal; or

###  

### (f)                                    TheCompany shall take any corporate action authorizing, or in furtherance of, anyof the foregoing; or

###  

### (g)                                 TheCompany shall have breached any Material covenant in this Agreement, theSecurity Agreement, or the Note (other than such as are referred to above in thisArticle VII), and, with respect to any breach capable of being cured, suchbreach shall not have been cured within thirty (30) days following notice ofsuch Material breach to the Company by the Purchaser; or

###  

### (h)                                 JohnLowry shall have breached any Material covenant in the Stock Pledge Agreementand, with respect to any breach capable of being cured, such breach shall nothave been cured within thirty (30) days following notice of such Materialbreach to Mr. Lowry by the Purchaser; or

###  

### (i)                                     Anyrepresentation or warranty subject to a Materiality qualification made by theCompany herein or in the Note, the Security Agreement or the Pledge Agreementshall prove to have been incorrect in any respect, or any representation orwarranty not subject to a Materiality qualification made by the Company hereinor in Note, the Security Agreement or the Pledge Agreement shall prove to havebeen incorrect in any Material respect.

###  

### Incase any one or more Events of Default shall occur and be continuing, thePurchaser may proceed to protect and enforce its rights by an action at law,suit in equity or other appropriate proceeding, whether for the specificperformance of any agreement contained herein, in the Security Agreement, inthe Pledge Agreement or in the Note, or for an injunction against a violationof any of the terms hereof or thereof, or in aid of the exercise of any powergranted hereby or thereby or by law or otherwise.  In case of a default in the payment of anyprincipal of

 

29

----

 

### or premium, ifany, or interest on the Note, the Company will pay to the Purchaser suchfurther amount as shall be sufficient to cover the cost and expenses ofcollection, including, without limitation, reasonable attorneys’ fees, expensesand disbursements.  No course of dealingand no delay on the part of the Purchaser in exercising any right, power orremedy shall operate as a waiver thereof or otherwise prejudice its rights,powers or remedies.  No right, power orremedy conferred by this Agreement, the Security Agreement, the PledgeAgreement or by the Note upon the Purchaser shall be exclusive of any otherright, power or remedy referred to herein or therein or now or hereafteravailable at law, in equity, by statute or otherwise.

###  

### Inaddition to the foregoing, and notwithstanding any other provision herein or inthe Note to the contrary, in case of an Event of Default as a result of thematter set forth in sub-clause (b) above, the Outstanding Balance on the Noteshall automatically be increased by and additional $200,000.

###  

# **ARTICLE VIIIMISCELLANEOUS**

# ** **

**8.1****                               NoThird Party Beneficiaries.**

 

Exceptas expressly provided herein, this Agreement shall not confer any rights orremedies upon any Person other than the parties and their respective successorsand permitted assigns, personal representatives, heirs and estates, as the casemay be.

 

**8.2****                               EntireAgreement.**

 

ThisAgreement and the Note, together with the Security Agreement and the PledgeAgreement, constitute the entire agreement among the parties hereto andsupersede any prior understandings, agreements or representations by or amongthe parties hereto, written or oral, that may have related in any way to thesubject matter of any Document.

 

**8.3****                               Successorsand Assigns.**

 

ThisAgreement shall be binding upon and inure to the benefit of the parties heretoand their respective successors and permitted assigns.  The Company may not assign either thisAgreement or any of its rights, interests, or obligations hereunder without theprior written approval of the Purchaser. The Purchaser may assign this Agreement and its any rights or interestshereunder without any prior consent (subject to the provisions of Section6.7 hereof).

 

**8.4****                               Counterparts.**

 

ThisAgreement may be executed in one or more counterparts, each of which shall bedeemed an original but all of which together shall constitute one and the sameinstrument.  This Agreement may beexecuted by facsimile.

 

**8.5****                               Notices.**

 

Allnotices, requests, demands, claims, and other communications hereunder shall bein writing and shall be deemed to have been duly given if delivered personally,telecopied, sent by

 

30

----

 

nationally recognized overnight courier or mailed byregistered or certified mail (return receipt requested), postage prepaid, tothe parties hereto at the following addresses (or at such other address for aparty as shall be specified by like notice):

 
| If to the Purchaser:                                | Digital Theater Systems, Inc.             |
|-----------------------------------------------------|-------------------------------------------|
|                                                | 5171 Clareton Drive                       |
|                                                | Agoura Hills, California                  |
|                                                | Telephone:                                | (818) 706-3525 |
|                                                | Facsimile:                                | (818) 706- |
|                                                | Attention:                                | General Counsel |
|                                                |                                      |
| with a copy to (which shall not constitute notice): |
|                                                |                                      |
|                                                | Troy & Gould Professional Corporation |
|                                                | 1801 Century Park East                    |
|                                                | 16th Floor                                |
|                                                | Los Angeles, CA 90067                     |
|                                                | Telephone:                                | (310) 553-4441 |
|                                                | Facsimile:                                | (310) 201-4746 |
|                                                | Attention:                                | Lawrence Schnapp, Esq. |
|                                                |                                      |
| If to the Company:                                  | Lowry Digital Images, Inc.                |
|                                                | 2777 Ontario Street                       |
|                                                | Burbank, California 91504                 |
|                                                |                                      |
|                                                | Telephone:                                | 818.557.7333 |
|                                                | Facsimile:                                | 818.557.7513 |
|                                                | Attention:                                | John D. Lowry |
|                                                |                                      |
| with a copy to (which shall not constitute notice): |
|                                                |                                      |
|                                                | Wolf, Rifkin, Shapiro & Schulman, LLP |
|                                                | 11400 W. Olympic Boulevard, Suite 900     |
|                                                | Los Angeles, California 90064             |
|                                                | Telephone:                                | 310.478.4100 |
|                                                | Facsimile:                                | 310.479.1422 |
|                                                | Attention:                                | Richard Grant, Esq. |

 

Allsuch notices and other communications shall be deemed to have been given andreceived (i) in the case of personal delivery, on the date of such delivery,(ii) in the case of delivery by telecopy, on the date of such delivery, (iii)in the case of delivery by nationally recognized overnight courier, on thethird business day following dispatch and (iv) in the case of mailing, on theseventh business day following such mailing.

 

31

----

 

**8.6****                               GoverningLaw.**

 

**THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED INACCORDANCE WITH THE INTERNAL LAWS OF THE SATE OF CALIFORNIA, WITHOUT GIVINGEFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THESTATE OF CALIFORNIA, OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OFANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE APPLIED.  IN FURTHERANCE OF THE FOREGOING, THE INTERNALLAW OF THE STATE OF CALIFORNIA WILL CONTROL THE INTERPRETATION AND CONSTRUCTIONOF THIS AGREEMENT, EVEN IF UNDER SUCH JURISDICTION’S CHOICE OF LAW OR CONFLICTOF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULDORDINARILY APPLY.**

 

**8.7****                               Amendmentsand Waivers; Purchasers’ Consent.**

 

Noamendment of any provision of this Agreement shall be valid unless the sameshall be in writing and signed by the Company and the Purchaser.  No waiver by any party hereto of any default,misrepresentation, or breach of warranty or covenant hereunder, whetherintentional or not, shall be deemed to extend to any prior or subsequentdefault, misrepresentation, or breach of warranty or covenant hereunder oraffect in any way any rights arising by virtue of any prior or subsequent suchoccurrence.

 

**8.8****                               Incorporationof Exhibits.**

 

TheExhibits and Schedules identified in this Agreement are incorporated herein byreference and made a part hereof.

 

**8.9****                               Construction.**

 

Wherespecific language is used to clarify by example a general statement containedherein, such specific language shall not be deemed to modify, limit or restrictin any manner the construction of the general statement to which itrelates.  The language used in thisAgreement shall be deemed to be the language chosen by the parties hereto toexpress their mutual intent, and no rule of strict construction shall be appliedagainst any party hereto.

 

**8.10****                        Interpretation.**

 

Accountingterms used but not otherwise defined herein shall have the meanings given tothem under GAAP.  As used in thisAgreement (including all Exhibits and amendments hereto), the masculine, feminineand neuter gender and the singular or plural number shall be deemed to includethe others whenever the context so requires. References to Articles and Sections refer to articles and sections ofthis Agreement.  Similarly, references toExhibits refer to exhibits attached to this Agreement.  Unless the content requires otherwise, wordssuch as “hereby,” “herein,” “hereinafter,” “hereof,” “hereto,” “hereunder” andwords of like import refer to this Agreement. The article and section headings contained in this Agreement areinserted for convenience only and shall not affect in any way the meaning orinterpretation of this Agreement.

 

32

----

 

**8.11****                        Remedies.**

 

Theparties hereto shall each have and retain all other rights and remediesexisting in their favor at Law or equity, including, without limitation, anyactions for specific performance and/or injunctive or other equitable relief(including, without limitation, the remedy of rescission) to enforce or preventany violations of the provisions of this Agreement.  Without limiting the generality of theforegoing, the Company hereby agrees that in the event the Company fails toconvey the Note or any of the Conversion Securities to the Purchaser inaccordance with the provisions of this Agreement, the Purchaser’s remedy at lawmay be inadequate.  In such event, thePurchaser shall have the right, in addition to all other rights and remedies itmay have, to specific performance of the obligations of the Company to conveysuch securities.

 

**8.12****                        Severability.**

 

It isthe desire and intent of the parties hereto that the provisions of thisAgreement be enforced to the fullest extent permissible under the laws andpublic policies applied in each jurisdiction in which enforcement issought.  Accordingly, if any particularprovision of this Agreement shall be adjudicated by a court of competentjurisdiction to be invalid, prohibited or unenforceable for any reason, suchprovision, as to such jurisdiction, shall be ineffective, without invalidatingthe remaining provisions of this Agreement or affecting the validity orenforceability of this Agreement or affecting the validity or enforceability ofsuch provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowlydrawn so as not to be invalid, prohibited or unenforceable in suchjurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, withoutinvalidating the remaining provisions of this Agreement or affecting the validityor enforceability of such provision in any other jurisdiction.

 

**8.13****                        Waiverof Jury Trial.**

 

**EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALLRIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OFOR RELATING TO THIS AGREEMENT OR ANY OTHER DOCUMENT.**

 

**[THIS SPACE INTENTIONALLY LEFT BLANK]**

 

33

----

 

INWITNESS WHEREOF, the parties hereto have executed this Secured Convertible NotePurchase Agreement as of the date first above written.

 
| ** ** | **THE COMPANY**:              |
|------------|-------------------------------|
|       |                          |
|       |                          |
|       | By:                           |    /s/ John Lowry, CEO |   |
|       |                          |
|       |                          |
| ** ** | **THE PURCHASER**:            |
|       |                          |
|       | DIGITAL THEATER SYSTEMS, INC. |
|       |                          |
|       |                          |
|       | By:                           |   /s/ Jon E. Kirchner |   |
|       | Name:                         |    Jon E. Kirchner |   |
|       | Its:                          |    President and Chief Executive Officer |
|            |                               |  |  |  |

 

34

----

 

**Exhibit A**

 

**[Form of Note]**

 

----

 

NEITHER THIS NOTE, NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF,HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATESECURITIES LAWS.  THIS NOTE HAS BEENACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAYNOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THEABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH NOTE UNDER THESECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES STATUTEOR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT ANDAPPLICABLE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANYTHAT SUCH REGISTRATION IS NOT REQUIRED.

 

**LOWRY DIGITAL IMAGES, INC.**

 

**SECURED CONVERTIBLE PROMISSORY NOTE**

 
|            |   | Burbank, California |
|-----------------|--------|---------------------|
| U.S. $1,000,000 |   | December 17, 2004   |

 

This SECURED CONVERTIBLE PROMISSORY NOTE (this “Note”) is issuedpursuant to that certain Secured Convertible Note Purchase Agreement dated asof the date hereof (the “Note Purchase Agreement”), by and between LowryDigital Images, Inc., a California corporation (the “Company”), andDigital Theater Systems, Inc., a Delaware corporation (the “Lender”),and is entitled to the benefits of the Note Purchase Agreement.  The payment of the principal sum of thisNote, including interest accrued thereon, is secured pursuant to the terms ofthat certain Security Agreement dated as of June 2, 2004 (the “SecurityAgreement”), by and between the Company and the Lender.  Capitalized terms used herein and not definedshall have the meanings ascribed to them in the Note Purchase Agreement.

 

1.                                       Principaland Interest.  The Company, for valuereceived, hereby promises to pay to the order of Digital Theater Systems, Inc.,or holder (either, the “Holder”) in lawful money of the United States,the principal amount of One Million Dollars ($1,000,000), together withinterest (computed on the basis of a 360 day year) accrued on the unpaidprincipal of this Note at the rate of six percent (6.0%) per annum commencingon the date hereof and compounding monthly. Accrued interest on this Note shall be payable in full in cash on theMaturity Date (as defined below).  Noamount shall be due on this Note prior to the Maturity Date, except as providedin Section 7 hereof.  The amountoutstanding on this Note is subject to increase as described in the lastsentence of Article VII of the Note Purchase Agreement.

 

Subject to Section 2 hereof, this Note is due and payable(a) on December 17, 2005 (the “Maturity Date”); or (b) ondemand by written notice following the occurrence of an Event of Default.  Subject to Section 2 hereof, the Companyshall, on the Maturity Date or, if earlier, within one (1) Business Day ofreceipt of the written notice referred to in the immediately preceding sentence(the “Payment Date”), pay the outstanding principal and all accrued andunpaid interest on this Note (as well as any other amounts payable hereunder)as of the Maturity Date or the Payment Date, as applicable.  All payments shall be applied first toaccrued interest and other amounts payable hereon, and the balance toprincipal.

 

----

 

2.                                       OptionalConversion.  Upon the demand bywritten notice made by the Lender (the date such notice is received beingreferred to herein as the “Notice Date”), the Company shall, in lieu ofrepaying this Note, convert this Note into that number of shares of the Company’scommon stock such that, following conversion, the number of shares so issuedrepresents 10.0% of the then-outstanding shares of the Company’s capital stock(treating as outstanding all shares issuable upon exercise of options,warrants, convertible notes (including other convertible notes held by theLender) and other convertible securities, including options authorized by astock option plan but not yet issued), at the time of conversion.  Such a notice may be sent by the Lender atany time on or after January 31, 2005. Upon an acquisition of Shares pursuant to the exercise of suchconversion rights, the Lender shall be deemed to have again made in favor ofthe Company the representations and warranties set forth in Section 5.5 of theNote Purchase Agreement.  Notwithstandinganything to the contrary in this Note, the right to conversion set forth inthis paragraph is personal to the Lender, and neither such right nor anyinterest therein may be assigned or transferred by the Lender to any Personother than to an Affiliate of the Lender.

 

3.                                       NoUsury.  This Note is hereby expresslylimited so that in no event whatsoever, whether by reason of deferment oradvancement of loan proceeds, acceleration of maturity of the loan evidencedhereby, or otherwise, shall the amount paid or agreed to be paid to the Holderhereunder for the loan, use, forbearance or detention of money exceed themaximum interest rate permitted by the laws of the State of California.  If at any time the performance of anyprovision involves a payment exceeding the limit of the price that may bevalidly charged for the loan, use, forbearance or detention of money underapplicable law, then automatically and retroactively, ipso facto, theobligation to be performed shall be reduced to such limit, it being thespecific intent of the Company and the Holder hereof that all payments underthis Note are to be credited first to interest as permitted by law, but not inexcess of (i) the agreed rate of interest hereunder, or (ii) thatpermitted by law, whichever is the lesser, and the balance toward the reductionof principal.

 

4.                                       Attorneys’Fees.  If the indebtednessrepresented by this Note or any part hereof is collected in bankruptcy,receivership or other judicial proceedings or if this Note is placed in thehands of attorneys for collection after default, the Company agrees to pay, inaddition to the principal and interest payable hereunder, reasonable attorneys’fees and costs incurred by the Holder, as well as any and all interest that hasaccrued on the outstanding principal after the commencement of bankruptcy,receivership or other judicial proceedings.

 

5.                                       Transfer.

 

(a)                                  Subjectto the last sentence of Section 2 above, the rights and obligations of theCompany and the Holder of this Note will be binding upon and inure to thebenefit of the successors, assigns, heirs, administrators and transferees ofthe parties hereto.

 

(b)                                 Subjectto the last sentence of Section 2 above, the Holder may, prior to conversionhereof, surrender this Note at the principal office of the Company for transferor exchange of all or any portion of this Note. Within a reasonable time after notice to the Company by the Holder ofits intention to make such exchange and without expense to the Holder, exceptfor any transfer or similar tax which may be imposed on the transfer orexchange,

 

2

----

 

the Company shall issue in exchange therefor another note or notes forthe same aggregate principal amount as the unpaid principal amount of the Noteso surrendered, having the same rate of interest, containing the sameprovisions, and subject to the same terms and conditions as the Note sosurrendered, subject to the last sentence of Section 2 above.  Each such new Note shall be made payable tosuch person or persons, or transferees, as the Holder of such surrendered Notemay designate in writing.  Notwithstanding anything in this Note to thecontrary, no opinion of counsel shall be required in connection with a transferunder this Section 5(b) to any such transferee.

 

6.                                       Notices.  Any notice, other communication or paymentrequired or permitted hereunder shall be in writing and shall be deemed to havebeen given if delivered as described in the Notices section of the NotePurchase Agreement and to the appropriate addresses listed therein.

 

7.                                       Eventof Default.

 

(a)                                  General.  If an Event of Default occurs, the Holdermay, by notice to the Company, declare the principal amount then outstandingof, and the accrued interest and all other amounts payable on this Note to beimmediately due and payable.  The Companywill give the Holder of this Note written notice of the occurrence of an Eventof Default promptly (setting forth in reasonable detail all facts relatedthereto) and in any event no later than five (5) Business Days after theCompany has knowledge of the occurrence of any such event.

 

In case any one or more Events of Default shall occur and becontinuing, the Holder may proceed to protect and enforce its rights by anaction at law, suit in equity or other appropriate proceeding, whether for thespecific performance of any agreement contained herein or in the Note PurchaseAgreement, the Security Agreement or for an injunction against a violation ofany of the terms hereof or thereof, or in aid of the exercise of any powergranted hereby or thereby or by law or otherwise.  In case of a default in the payment of anyprincipal of or premium, if any, or interest on this Note, the Company will payto the Holder such further amount as shall be sufficient to cover the cost andexpenses of collection, including, without limitation, reasonable attorneys’ fees,expenses and disbursements.  No course ofdealing and no delay on the part of the Holder in exercising any right, poweror remedy shall operate as a waiver thereof or otherwise prejudice the Holder’srights, powers or remedies.  No right,power or remedy conferred by this Note, the Security Agreement or the NotePurchase Agreement upon the Holder shall be exclusive of any other right, poweror remedy referred to herein or therein or now or hereafter available at law,in equity, by statute or otherwise.

 

8.                                       Waiversand Amendments.  The Company herebywaives presentment, demand for performance, notice of non-performance, protest,notice of protest and notice of dishonor. No delay on the part of the Holder in exercising any right hereundershall operate as a waiver of such right or any other right.  Any term of this Note or the SecurityAgreement may be amended or waived only with the written consent of the Companyand the Holder.

 

9.                                       GoverningLaw.  This Note is being deliveredin, and shall be governed by and construed in accordance with, the laws of theState of California, without regard to conflicts of laws provisions thereof.

 

3

----

 

10.                                 Prepayment.  If the Lender has not exercised its right toconversion set forth in Section 2, the Company may prepay all (but not lessthan all) of this Note five (5) days following delivery of a written notice ofprepayment, so long as such prepayment is accompanied by all interest accruedhereunder as of the date of such prepayment.

 

11.                                 JuryWaiver.  **THE COMPANYWAIVES ANY AND ALL RIGHTS THAT IT MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OFCALIFORNIA, OR ANY OTHER JURISDICTION, TO A TRIAL BY JURY OF ANY AND ALL ISSUESARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN THECOMPANY AND THE HOLDER OR ITS SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAYCONNECTED WITH THIS NOTE AND THE OTHER DOCUMENTS.  IT IS INTENDED THAT SAID WAIVER SHALL APPLYTO ANY AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION ORPROCEEDINGS.  THIS SECTION IS A MATERIALINDUCEMENT TO THE HOLDER TO ENTER INTO THE TRANSACTIONS CONTEMPLATED BY THENOTE PURCHASE AGREEMENT.**

 

12.                                 Covenant.  The Company covenants and agrees that, on orbefore such time as this Note is converted into equity securities of theCompany in accordance with its terms, the Company will take all such corporateaction as is necessary for the creation and issuance of the equity securitiesinto which this Note is to be converted.

 

13.                                 Miscellaneous.  In the event any one or more of theprovisions of this Note shall for any reason be held to be invalid, illegal orunenforceable, in whole or in part or in any respect, or in the event that anyone or more of the provisions of this Note operate or would prospectively operateto invalidate this Note, then and in any such event, such provision(s) onlyshall be deemed null and void and shall not affect any other provision of thisNote and the remaining provisions of this Note shall remain operative and infull force and effect and in no way shall be affected, prejudiced, or disturbedthereby.

 

 
| ** ** | **LOWRY DIGITAL IMAGES, INC.** |
|------------|--------------------------------|
|       |                           |
|       |                           |
|       | By:                            |  /s/ John Lowry, CEO |

 

4

----