**Exhibit 10.100**

 

 

 

**ASSET PURCHASE AGREEMENT**

 

**AMONG**

 

**UTSTARCOM, INC.,**

 

**TELOS TECHNOLOGY,INC.,**

 

**TELOS TECHNOLOGY (CANADA), INC.,**

 

**TELOS TECHNOLOGY (BERMUDA) LTD. AND**

 

**TELOS ENGINEERING LIMITED**

 

 

**APRIL 21, 2004**

 

 

 

 

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**ASSETPURCHASE AGREEMENT**

 

This ASSET PURCHASEAGREEMENT (this “**Agreement**”) ismade and entered into as of April 21, 2004 (the “**Agreement Date**”) by and among UTStarcom,Inc., a Delaware corporation (“**Buyer**”),TELOS Technology, Inc., a Delaware corporation (the “**Seller**”), TELOS Technology (Canada), Inc., a companyincorporated in British Columbia, Canada (“**TELOSCanada**”), TELOS Technology (Bermuda) Ltd., an exempted limitedliability company organized under the laws of Bermuda (“**TELOS Bermuda**”), TELOS Engineering Limited,a company incorporated under the laws of Hong Kong (“**TELOS Hong Kong**”, and together with Seller, TELOS Canada andTELOS Bermuda, the “**Telos Sellers**”and each such entity, individually, a “**TelosSeller**”).

 

**RECITALS**

 

A.                                   Theparties intend that, subject to the terms and conditions hereinafter set forth,Buyer or one or more direct or indirect wholly-owned subsidiaries of Buyershall purchase from the Telos Sellers and each of the Telos Sellers shall sell,transfer and assign to Buyer or such subsidiaries of Buyer, substantially all ofthe assets of the Telos Sellers, and in connection therewith, Buyer has agreedto assume certain specified liabilities of the Telos Sellers (the “**Asset Purchase**”), all pursuant to the termsand conditions of this Agreement and Applicable Law (as defined inArticle 1).  

 

B.                                     TheBoard of Directors of Seller has determined that the Asset Purchase is in thebest interests of Seller and Seller’s stockholders, has approved and declaredadvisable this Agreement and, accordingly, has agreed to effect the Asset Purchaseprovided for herein upon the terms and conditions of this Agreement.

 

C.                                     Concurrentlywith the execution and delivery of this Agreement, and as a condition andinducement to Buyer’s willingness to enter into this Agreement, those SellerStockholders (as defined in Article 1) that are listed on Exhibit A-1are executing and delivering to Buyer a Voting Agreement substantially in theform attached hereto as Exhibit A-2 (the “**Stockholder Agreement**”).

 

D.                                    Priorto the Closing Date (as defined in Article 1), certain employees of TelosSellers will receive from Buyer an Employment Offer Letter substantially in theform attached hereto as Exhibit B (the “**Employment Offer Letter**”).

 

E.                                      Buyerand Seller desire to make certain representations, warranties, covenants andagreements in connection with the Asset Purchase and to prescribe variousconditions to the Asset Purchase.

 

NOW, THEREFORE, inconsideration of the foregoing and the mutual promises, covenants andconditions contained herein, the parties hereby agree as follows:

 

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ARTICLE 1CERTAIN DEFINITIONS

 

As used in thisAgreement, the following terms shall have the meanings set forth below.  Unless indicated otherwise, all mathematicalcalculations contemplated hereby shall be made to the fifth decimal place.

 

“**Additional Indebtedness**”means Indebtedness incurred after the date hereof under Seller’s existingcredit lines or with existing investors (or their Affiliates) in an aggregateamount not to exceed $1,000,000.

 

“**Affiliate**” shall have themeaning set forth in Rule 405 of Regulation C promulgated under theSecurities Act.

 

“**Applicable Law**” means,collectively, all foreign, federal, state, local or municipal laws, statutes,ordinances, regulations, and rules, and all orders, writs, injunctions, awards,judgments and decrees applicable to Seller or any of its assets, properties andbusiness or its Subsidiaries or any of their assets, properties and business(and any regulations promulgated thereunder).

 

“**Assumed Liabilities**”means (i) all Liabilities of any Telos Seller under, or resulting from, anyAssumed Contract (as defined in Article 2) (other than Liabilities fordamages as a result of any breach by any Telos Seller prior to the Closing thatis not disclosed in the Schedules hereto), (ii) all Liabilities incurredin, relating to, or arising as a result of or in connection with, the operationof the Purchased Assets (as defined in Article 2) and/or the Businessafter the Closing, (iii) all Liabilities incurred in, relating to, orarising as a result of or in connection with, the operation of the PurchasedAssets and/or the Business that are (or should be) accounted for as currentliabilities under GAAP as of the Closing, including accounts payable andaccrued expenses, and which are either (A) reflected on the Seller BalanceSheet or (B) incurred after the date of the Seller Balance Sheet in theordinary course of business, other than Indebtedness, Transaction Expenses,Taxes and the Liabilities set forth in Section 2.1(d)(i)-(vii), (iv) allLiabilities for Taxes and charges to be paid by Buyer pursuant toSection 7.6, (v) all Liabilities that constitute warranty obligationsor service obligations relating to as a result of or in connection with, theoperation of the Purchased Assets and/or the Business sold by any Telos Seller,(vi) all Liabilities of the Telos Sellers for accrued compensation payableto Jack Mar and Ron McLeod, including accrued interest thereon; (vii) allLiabilities relating to each Transferring Employee (as defined in Section 6.10)arising from termination of their employment by any Telos Seller pursuant toSection 6.10 (other than, subject to subparagraph (vi) above, accruedcompensation and accrued vacation of each Transferring Employee through thedate of such termination) or arising from termination of their employment byBuyer or any of its Subsidiaries after the Closing (including any severanceobligations of any Telos Seller pursuant to employment or severance agreementsbetween such Telos Seller and a Transferring Employee arising as a result oftermination of such Transferring Employee by Buyer or its Subsidiaries afterthe Closing), or as a result of any revocation of the offer of employment toany Transferring Employee prior to Closing; (viii) the accrued Liability of the Telos Sellers to ComScapeTelecommunications of Charleston, Inc. (“**ComScape**”)pursuant to that certain Settlement Agreement and Mutual Release by and betweenComScape and Telos

 

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Engineering, Inc. dated March 17, 2004 andin respect of the 3Com Litigation; (ix) all Liabilities representing orrelating to deferred revenue of any Telos Seller; and (x) all Liabilitiesof the Telos Sellers under the SVB Credit Agreement.

 

“**Balance Sheet Date**” meansDecember 31, 2003, the date of the Seller Balance Sheet.

 

“**Bill of Sale and AssumptionAgreement**” means a Bill of Sale and Assumption Agreement insubstantially the form attached hereto as Exhibit C. 

 

“**Business**” means thebusiness of Seller or any of its Subsidiaries as conducted as of the date ofthis Agreement.

 

“**Buyer Ancillary Agreements**”means, collectively, each certificate to be delivered on behalf of Buyer by anofficer or officers of Buyer at the Closing pursuant to Article 8and each agreement or document (other than this Agreement) that Buyer is toenter into as a party thereto pursuant to this Agreement.

 

“**Closing**” means theclosing of the transactions to consummate the Asset Purchase.

 

“**Closing Balance Sheet**”means a balance sheet as of the Closing Date reflecting the Purchased Assetsand the Assumed Liabilities, to the extent such Purchased Assets and AssumedLiabilities are required by GAAP to be reflected on a balance sheet, preparedin a manner consistent with the 2003 Audited Financial Statements and withrespect to which the independent auditors of Seller have conducted a review inaccordance with customary practice.

 

“**Closing Date**” means atime and date to be specified by the parties, which shall be no later than thesecond business day after the satisfaction or waiver of the conditions setforth in Article 8 and Article 9, or at such other time, date andlocation as the parties hereto agree in writing.

 

“**Code**” means the InternalRevenue Code of 1986, as amended.

 

“**Contract**” means anywritten or legally binding contract, agreement, instrument, arrangement,commitment or undertaking (including leases, licenses, mortgages, notes,guarantees, sublicenses, subcontracts and purchase orders).

 

**“Current Assets”**means the following line items of Seller Balance Sheet, calculated on a basisconsistent with past practice of Seller: Cash & Investments, Restricted Cash, Accounts Receivable, Prepaid& Advances and Inventory.

 

**“Current Liabilities”**means the following line items of Seller Balance Sheet, calculated on a basisconsistent with past practices of Seller: Trade Accounts Payable, Accrued Liabilities, Comscape Contingency, BankLine of Credit, Other Accounts Payable, Salary & Related and InterestPayable.

 

“**Delaware Law**” means theGeneral Corporation Law of the State of Delaware.

 

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“**Documentation**” means,collectively, programmers’ notes or logs, source code annotations, user guides,manuals, instructions, software architecture designs, layouts, any know-how, andany other designs, plans, drawings, documentation, materials, supplier lists,software source code and object code, net lists, photographs, developmenttools, blueprints, media, memoranda and records that are primarily related toor otherwise necessary for the use and exploitation of any products of Selleror its Subsidiaries used in the Business, whether in tangible or intangibleform, whether owned by Seller or its Subsidiaries or held by Seller or itsSubsidiaries under any licenses or sublicenses (or similar grants of rights).

 

“**Encumbrance**” means, withrespect to any asset, any mortgage, deed of trust, lien, pledge, charge,security interest, title retention device, collateral assignment, adverseclaim, restriction or other encumbrance of any kind (excluding, with respect toSeller IP Rights (as defined in Section 4.13(b)), non-exclusive licensesof such Seller IP Rights) in respect of such asset (including any restrictionon the voting of any security, any restriction on the transfer of any security orother asset, any restriction on the receipt of any income derived from anyasset, any restriction on the use of any asset and any restriction on thepossession, exercise or transfer of any other attribute of ownership of anyasset).

 

“**ERISA**” means the EmployeeRetirement Income Security Act of 1974, as amended.

 

“**ERISA Affiliate**” meansany entity which is a member of: (A) a “controlled group of corporations,” as defined inSection 414(b) of the Code; (B) a group of entities under “commoncontrol,” as defined in Section 414(c) of the Code; or (C) an “affiliated service group,” as defined in Section 414(m) of the Code, ortreasury regulations promulgated under Section 414(o) of the Code, any ofwhich includes Seller.

 

“**Escrow Agreement**” meansthe escrow agreement relating to the Escrow Cash and the Working CapitalAdjustment Cash (as defined in Section 2.4), between the Seller, Buyer andan escrow agent to be selected by mutual agreement of Seller and Buyer prior tothe Closing, in substantially the form attached hereto as Exhibit D.

 

“**Escrow Cash**” means anamount of cash equal to ten percent (10%) of the Initial Payment, togetherwith the interest, earnings and income that accrues thereon.

 

“**Exchange Act**” means theSecurities Exchange Act of 1934, as amended.

 

“**Excluded Contracts**” means(i) any Contract with stockholders of Seller in their capacity as such oras lenders to any Telos Seller, including any shareholder agreements,registration rights agreements, voting agreements, proxies, warrants, notepurchase agreements, promissory notes and share purchase agreements,(ii) any agreements with lenders to any Telos Seller relating to (orevidencing) any Indebtedness (other than the SVB Credit Agreement) or anyAdditional Indebtedness, including any loan agreements and promissory notes,and (iii) the Contracts set forth in Schedule 1A.

 

“**GAAP**” means United Statesgenerally accepted accounting principles applied on a consistent basis.

 

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“**Governmental Authority**” meansany court or tribunal, governmental or regulatory body, administrative agency,commission or other governmental authority.

 

“**Holdback Cash**” means$2,500,000, together with the interest, earnings and income that accruesthereon. 

 

“**Indebtedness**” means theprincipal of, and accrued interest on (and other amounts payable to lenderswith respect to) any debt for money borrowed (including Seller’s borrowingsunder bank loans, convertible notes, senior notes and loans payable toofficers, directors and other affiliates) other than the principal of, andaccrued interest on, or other amounts payable to Silicon Valley Bank (“**SVB**”) with respect to, Seller’sindebtedness to SVB under the SVB Credit Agreement.

 

“**Intellectual Property**”means, collectively, all worldwide industrial and intellectual property rights,including patents, patent applications, patent rights, trademarks, trademarkregistrations and applications therefor, trade dress rights, trade names,service marks, service mark registrations and applications therefor, Internetdomain names, Internet and World Wide Web URLs or addresses, copyrights,copyright registrations and applications therefor, mask work rights, mask workregistrations and applications therefor, franchises, licenses, inventions, tradesecrets and know-how. 

 

“**Knowledge**” means, withrespect to Seller or Buyer, the actual knowledge of a particular fact,circumstance, event or other matter in question of the executive officers anddirectors of the Seller or Buyer, as the case may be, as of the date hereof andas of the Closing.

 

“**Liabilities**” means debts,liabilities, accounts payable and obligations, whether accrued or fixed,absolute or contingent, matured or unmatured, determined or determinable, knownor unknown, including those arising under any law, action or governmental orderand those arising under any Contract.

 

“**Material Adverse Change**”and “**Material Adverse Effect**” whenused in connection with an entity means any change, event, circumstance,condition or effect that is or is reasonably likely to be, individually or inthe aggregate, materially adverse to the condition (financial or otherwise),capitalization, properties, assets (including intangible assets), liabilities,business, operations or results of operations of such entity and itssubsidiaries, taken as a whole, except to the extent that any such change,event, circumstance, condition or effect primarily and directly resultsfrom:  (a) any change in conditionsin the United States, foreign or global economy or capital or financial marketsgenerally, including any change in interest or exchange rates, (b) anychange in conditions (including any change in general legal, regulatory,political, economic or business conditions or any change in GAAP) in orotherwise generally affecting the wireless communication industry or otherindustries in which such entity or group of entities conducts business thatdoes not have a materially disproportionate effect on such entity and itssubsidiaries taken as a whole, (c) the announcement, pendency orconsummation of this Agreement and the transactions contemplated hereby, and(d) any act of terrorism or war (whether or not threatened, pending ordeclared) in Nigeria, and any other act of terrorism or war (whether or notthreatened, pending or declared) that does not have a materiallydisproportionate effect on such entity and its subsidiaries taken as a whole.

 

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“**Permitted Encumbrances**”means:  (A) statutory liens forTaxes that are not yet due and payable, for which reserves have beenestablished in accordance with GAAP; (B) statutory liens to secureobligations to landlords, lessors or renters under leases or rental agreements;(C) deposits or pledges made in connection with, or to secure payment of,workers’ compensation, unemployment insurance or similar programs mandated byApplicable Law; and (D) statutory liens in favor of carriers,warehousemen, mechanics and materialmen, to secure claims for labor, materialsor supplies and other like liens.

 

“**Person**” means anyindividual, corporation, company, limited liability company, partnership,limited liability partnership, trust, estate, proprietorship, joint venture,association, organization, entity or Governmental Authority.

 

“**Post-Closing Tax Period**” means any taxableperiod (or portion thereof) beginning after the date of the Closing.

 

“**Pre-Closing Tax Period**” means any taxableperiod (or portion thereof) ending on or prior to the date of the Closing.

 

“**Property Taxes**” means real and personal advalorem property Taxes and any other Taxes imposed on a periodic basis andmeasured by the value of any item.

 

“**SEC**” means the Securitiesand Exchange Commission.

 

“**Securities Act**” means theSecurities Act of 1933, as amended.

 

“**Seller Ancillary Agreements**”means, collectively, each certificate to be delivered on behalf of any TelosSeller by an officer or officers of such Telos Seller at the Closing pursuantto Article 9 and each agreement (other than this Agreement) that any TelosSeller is to enter into as a party thereto pursuant to this Agreement.

 

“**Seller Balance Sheet**”means Seller’s unaudited balance sheet as of December 31, 2003included in the Seller Financial Statements.

 

“**Seller Capital Stock**”means the capital stock of Seller.

 

“**Seller Common Stock**”means the Common Stock, par value $0.001 per share, of Seller.

 

“**Seller Senior Convertible Notes**”means senior secured promissory notes in the aggregate principal amount of$4,850,000 exchangeable for shares of Series E Stock pursuant to its terms.

 

“**Seller Convertible Notes**”means the Seller Senior Convertible Notes.

 

“**Seller Financial Statements**”means (A) Seller’s audited balance sheet dated December 31, 2002and balance sheet (which is unaudited as of the date hereof) datedDecember 31, 2003 and (B) Seller’s audited statements ofoperations, statements of cash flows and statements of changes in stockholders’equity for the year ended December 31, 2002, and

 

 

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statements of operations, statements of cash flows and statements ofchanges in stockholders’ equity for the year ended December 31, 2003,and any notes to the foregoing financial statements. 

 

“**Seller Option Plan**” meansthe 1998 Equity Incentive Plan of Seller.

 

“**Seller Optionholders**” meansthe holders of Seller Options.

 

“**Seller Options**” meansoptions to purchase shares of Seller Common Stock.

 

“**Seller Product or Service**”(and, with correlative meaning, “**SellerProducts or Services**”) means any product, system or servicecurrently produced, manufactured, marketed, licensed, sold, furnished ordistributed by Seller or any of its Subsidiaries, including all CDMA and GSMnetworks, systems and products, and all bundled components thereof, and eachproduct, system or service currently under development by Seller (whichproducts, systems or services that are under development are in the nature ofupgrades, enhancements and new features and not new products); provided, thatfor purposes of calculation of the Earnout (as defined in Section 3.1):

 

(i)                                     allcomponents of the Seller Products or Services (whether supplied by Seller orany of its Subsidiaries, or by Buyer or any of its Affiliates, or by any thirdparty), when sold as part of a CDMA or GSM network, system or product or, inthe case of sales by the Seller Product Division, as replacement or additionalcomponents of a CDMA or GSM network, system or product, shall be consideredSeller Products or Services; and

 

(ii)                                  allCDMA or GSM networks, systems or products sold by Buyer or any Affiliate ofBuyer, that incorporate Seller Technology, shall be considered as SellerProduct or Services for purposes of calculation of the Earnout.

 

“**Seller Preferred Stock**”means the Series A Stock, Series B Stock, Series C Stock,Series D Stock and Series E Stock.

 

“**Seller Securityholders**”means the Seller Stockholders, Seller Optionholders and holders of SellerConvertible Notes, collectively.

 

“**Seller Stockholders**”means the holders of shares of Seller Capital Stock.

 

“**Seller Technology**” meansany technology, Software or Intellectual Property developed by or owned by aTelos Seller.

 

“**Seller Warrants**” meansSeries B Warrants, Series C Warrants and Series E Warrants.

 

“**Series A Stock**”means the Series A Convertible Preferred Stock, par value $0.001 pershare, of Seller.

 

“**Series B Stock**”means the Series B Convertible Preferred Stock, par value $0.001 pershare, of Seller.

 

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“**Series B Warrants**”means warrants to purchase shares of Series B Stock.

 

“**Series C Stock**” meansthe Series C Convertible Preferred Stock, par value $0.001 per share, ofSeller. 

 

“**Series C Warrants**”means warrants to purchase shares of Series C Stock.

 

“**Series D Stock**”means the Series D Convertible Preferred Stock, par value $0.001 pershare, of Seller.

 

“**Series E Stock**”means the Series E Convertible Preferred Stock, par value $0.001 pershare, of Seller.

 

“**Series E Warrants**”means warrants to purchase shares of Series E Stock.

 

“**Software**” means any andall past and current versions of the software (including all software programs,databases, objects, modules, routines, algorithms and code, in both Source Codeand object code form) that is: (A) embodied in or used by any product licensed or sold by a TelosSeller in connection with the Business, (B) comprising part of any SellerProduct or Service, (C) used in the development or the utilization of thesoftware described in clauses (A) and (B) of this paragraph; and(D) all derivative works of any of the software described inclauses (A) through (C) of this paragraph.

 

“**Source Code**” means thesoftware programming code expressed in human readable language includingcomplete maintenance documentation, procedures, flow charts, schematic diagramsand annotations which comprise the precoding detail design specification, andall other material necessary by industry standards to allow a reasonablyskilled programmer or analyst to maintain and enhance the Software. 

 

“**Straddle Period**” means any taxable periodbeginning on or prior to and ending after the date of the Closing.

 

“**Subsidiary**” of an entitymeans a corporation or other business entity in which such entity owns,directly or indirectly, at least a 50% interest or that is otherwise, directlyor indirectly, controlled by such entity.

 

**“SVB Credit Agreement**”means, collectively, that certain Loan and Security Agreement by and among SVB,Seller and TELOS Bermuda, dated June 8, 2000, as amendedSeptember 9, 2000 and those Loan Modification Agreements by and amongSVB, Seller and TELOS Bermuda, dated July 5, 2001,May 14, 2003 and December 2, 2003.

 

“**Tax**” (and, withcorrelative meaning, “**Taxes**”)means (A) any net income, alternative or add-on minimum tax, gross income,gross receipts, sales, use, ad valorem, transfer, franchise, profits, license,withholding, payroll, employment, excise, severance, stamp, occupation,premium, property, environmental or windfall profit tax, custom duty or othertax, governmental fee or other like assessment or charge of any kindwhatsoever, together with any interest or any penalty, addition to tax oradditional amount imposed by any governmental entity responsible for theimposition of any such tax (domestic or foreign), (B) any liability forthe 

 

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payment of any amounts of the type described in clause (A) of thissentence as a result of being a member of an affiliated, consolidated,combined, unitary or aggregate group for any taxable period, and (C) anyliability for the payment of any amounts of the type described in clause (A)or (B) of this sentence as a result of being a transferee of or successor toany Person or as a result of any express or implied obligation to indemnify anyother Person.

 

“**Tax Return**” means anyreturn, declaration, report, election, claim for refund or information returnor other statement or form filed or required to be filed with any GovernmentalAuthority relating to Taxes, including any schedule or attachment theretoor any amendment thereof.

 

“**Transaction Expenses**”means all costs and expenses incurred by Seller or Buyer, as applicable, inconnection with the Asset Purchase and this Agreement and the transactionscontemplated hereby (including any fees and expenses of legal counsel,financial advisors, investment bankers and accountants).

 

“**3Com Litigation**” meansthe default judgment of $125,525.85 plus costs and interest rendered in 3ComCorp v. TELOS Technology (Canada), Inc. (Cal. Sup.Ct.).

 

Other capitalizedterms defined elsewhere in this Agreement and not defined in thisArticle 1 shall have the meanings assigned to such terms in thisAgreement.

 

ARTICLE 2THE ASSET PURCHASE

 

2.1                                 Purchaseand Sale.

 

(a)                                  Uponthe terms and subject to the conditions of this Agreement, Buyer agrees topurchase, or cause to be purchased, from each Telos Seller and each TelosSeller agrees to sell, transfer, convey, assign and deliver, or cause to besold, transferred, conveyed, assigned and delivered, to Buyer or a Persondesignated by Buyer at Closing all of its right, title and interest in and toall of its respective assets, properties and business of every kind anddescription, wherever located, real, personal or mixed, tangible or intangible,free and clear of any Encumbrances whatsoever (other than PermittedEncumbrances), other than any Excluded Assets (as defined below), including,without limitation, the following (collectively, the “**Purchased Assets**”):

 

#### (i)                                     All of the tangible assetsof each Telos Seller, including:

 

##### (1)          All inventory (consisting of raw materials, work inprocess and finished goods);

 

##### (2)          All furniture, fixtures, equipment, furnishings,office supplies, servers, networking equipment and other tangible personalproperty; and

 

##### (3)          All tangible embodiments of Software,specifications, schematics, designs, drawings, blue prints, models, sketches,technical manuals, operating

 

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manuals, flow charts and related files for the Seller Product orServices owned by or in possession of any Telos Seller.

 

#### (ii)                                  All transferable licenses,permits and authorizations relating to any governmental authorization(including any general business licenses to conduct business in a particularjurisdiction and the like) (the “***Permits***”) (or to theextent such Permits are not freely transferable by the holder thereof, allrights, title and interest of the Telos Sellers in such Permits to the fullextent such right, title or interest may be transferred), and any pendingapplications for any Permits, and copies of all reports and certificationsrelated to the Permits or to other similar licenses, permits and authorizationsthat are not transferable;

 

#### (iii)                               All cash, cash equivalents,bank accounts, securities and investments;

 

#### (iv)                              The Seller-Owned IP Rightsthat are owned by each Telos Seller, copies and tangible embodiments thereof inwhatever form or medium, all rights in any of the foregoing provided byinternational treaties or conventions, and all rights to sue and recover fordamages for past, present and future infringement, dilution, misappropriation,violation, unlawful imitation or breach thereof;

 

#### (v)                                 All goodwill of each TelosSeller;

 

#### (vi)                              All prepaid expenses,security deposits or advances paid by any Telos Seller;

 

#### (vii)                           To the extent assignable,all rights of each Telos Seller under all warranties, representations andguarantees made by suppliers, distributors, manufacturers or contractors;

 

#### (viii)                        All transferable rights ofeach Telos Seller under all Contracts to which such Telos Seller is a party andwhich is related to the Business and/or the Purchased Assets, including eachlisted on Schedule 2.1(a)(viii) including any amendments, supplements andmodifications thereto but excluding the Excluded Contracts (collectively, the “**AssumedContracts**”);

 

#### (ix)                                All accounts receivable ofthe Telos Sellers and related deposits, security or collateral therefor,including recoverable customer deposits;

 

#### (x)                                   All rights under anypurchase orders to purchase any inventory, or to sell any Seller Product orService;

 

#### (xi)                                All marketing, sales andpromotional literature relating to any Seller Product or Service owned by or inthe possession of any Telos Seller;

 

#### (xii)                             Copies of all books,records, files or correspondence, whether in hard copy or computer format,relating in any manner to the Business in the possession of any Telos Seller,including (A) engineering information, manuals and data, (B) (to theextent permitted by Applicable Law) personnel and payroll records of theemployees of each Telos

 

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Seller, (C) all customer and vendor records, (D) all recordsof present and former suppliers, (E) copies of any information relating toTaxes imposed on the Purchased Assets, and (F) copies of all lists ofleads, and the right to use all of the foregoing in this paragraph (xii); *provided*, *however*,that Seller shall retain the right to retain copies of, and use, theinformation contained in the items in this paragraph (xii) solely for purposesof liquidating the Telos Sellers and for Tax purposes;

 

#### (xiii)                          all rights, privileges, claims,demands, refunds, indemnification agreements in favor of each Telos Sellerwith, and indemnification and similar rights against, third parties; 

 

#### (xiv)                         all insurance proceeds orclaims under insurance policies in effect as of the date hereof arising out ofany claims made or damages to any Purchased Assets on or after the date hereof;and

 

#### (xv)                            all rights or claims againstformer employees or consultants.

 

(b)                                 ExcludedAssets.  The following assets andproperties of the Telos Sellers (the “**ExcludedAssets**”) shall be excluded from the Purchased Assets:

 

#### (i)                                     Any rights related to, andany rights or claims against any third party related to, any Excluded Liability(including any rights or claims that may be asserted as a defense to, orcounterclaim or offset against, any Excluded Liability); 

 

#### (ii)                                  Any amounts payable to, orclaims or causes of action of, any of the Telos Sellers in respect of Taxes,including duty drawbacks, Tax credits and Taxes refundable to any Telos Sellerin respect of transactions completed prior to the Closing or in respect of anyperiod or portion thereof ending on or prior to the Closing;

 

#### (iii)                               Any refunds due from, orpayments due on, claims with insurers in respect of losses, Liabilities ordamages arising prior to the date hereof and for which a claim has been madewith the insurer prior to the date hereof;

 

#### (iv)                              All books, documents,records and files prepared in connection with or relating to the transactionscontemplated by this Agreement;

 

#### (v)                                 All income Tax Returns andfinancial statements of Telos Sellers, and all minute books, stock record booksand other corporate records of Telos Sellers;

 

#### (vi)                              Any capital stock of anySubsidiaries of any Telos Seller;

 

#### (vii)                           The Excluded Contracts;

 

#### (viii)                        Any rights or claims with respectto intercompany debt or Liabilities between or among the Telos Sellers; and

 

#### (ix)                                Those assets listed onSchedule 2.1(b).

 

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(c)                                  Assumptionof Liabilities.  Subject to theterms and conditions of this Agreement, upon the Closing, Buyer will assume,and promptly pay, perform and discharge when due, the Assumed Liabilities,including payment and discharge of those Assumed Liabilities listed onSchedule 2.1(c) upon the Closing.

 

(d)                                 ExcludedLiabilities.  Notwithstanding anyprovision in this Agreement, or any schedule or exhibit hereto andregardless of any disclosure to Buyer, the Telos Sellers shall retain, andshall promptly pay, perform and discharge when due, and Buyer shall not assumeor have any responsibility for (i) except as set forth in subparagraphs(vi) and (vii) of the definition of “Assumed Liabilities” in Article 1hereof, any Liabilities of any Telos Seller that may have accrued prior toClosing with respect to directors, officers, employees or consultants of suchTelos Seller (including, without limitation, in respect of accrued vacation andaccrued compensation) and, except as set forth in Section 6.10, anyLiabilities of any Telos Seller that may accrue on or after the Closing withrespect to any such person who is not a Transferring Employee (as defined inSection 6.10) as of the Closing, (ii) any Liabilities of any TelosSeller for Taxes, (iii) any Liabilities of any Telos Seller for contingentpayments to interWAVE Communications International, Limited pursuant to theTechnology Licensing Agreement by and between interWAVE CommunicationsInternational Ltd., interWAVE Advanced Communications, Inc. and Seller onOctober 10, 2002; (iv) any Liabilities of any Telos Seller pursuantto any claims, judgments or arbitration awards against such Telos Seller withrespect to any tort, breach of contract (other than warranties with respect toSeller Products or Services and which are Assumed Liabilities) or violation oflaw prior to the Closing by such Telos Seller (other than with respect toComscape or the 3Com Litigation), (v) all Liabilities relating to orarising out of the Excluded Assets or the Excluded Contracts, (vi) allLiabilities of Seller arising under the Management Incentive Plan–M&A ofSeller and all Liabilities of Seller arising under the Technical PersonnelRetention Bonus Program of Seller; (vii) all Liabilities relating to orarising out of the matters listed on Schedule 2.1(d) or(viii) any other Liabilities of any Telos Seller other than the AssumedLiabilities (such Liabilities of the Telos Sellers other than the AssumedLiabilities, the “**Excluded Liabilities**”).

 

(e)                                  Conveyanceof Assets.  The sale, conveyance,assignment, transfer and delivery of the Purchased Assets, and assumption byBuyer of the Assumed Liabilities, will be effected by execution and delivery byeach Telos Seller and Buyer (or one or more Subsidiaries of Buyer designated byBuyer), as applicable, at the Closing of (i) a duly executed Bill of Saleand Assumption Agreement in the attached hereto as Exhibit C,(ii) instruments of assignment assigning each Telos Seller’s interest inand to the Seller-Owned IP Rights owned by it, including all registeredIntellectual Property and pending applications with respect thereto pursuant tothe form of Assignment of Patent Rights attached hereto as Exhibit E(the “**Patent Assignment**”) and theform of Assignment of Trademarks attached hereto as Exhibit G (the“**Trademark and Domain Name Assignments**”),(iii)  such other good and sufficient instruments of sale, conveyance,transfer and assignment  as the partiesshall reasonably agree as necessary to vest in Buyer (or Buyer’s designee) goodand valid title to the Purchased Assets free and clear of all Encumbrances,except for Permitted Encumbrances (collectively, the “**Other Instruments**”).

 

(f)                                    Non-Assignable Assets.  Notwithstandinganything contained herein to the contrary, this Agreement shall not require theassignment or sublicense of any of the Contracts or

 

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Permits where such assignment would constitute a breach thereof butwhich would otherwise be included in the Purchased Assets (the “**Non-Assignable Assets**”).  Each Telos Seller shall, prior to and afterthe Closing Date, use its reasonable best efforts, and Buyer shall cooperate inall reasonable respects with such Telos Seller, to obtain all consents andwaivers necessary to convey and assign (or sublicense, in the case of Contractsconsisting of licenses) any Non-Assignable Assets to the Buyer; provided,however, that neither any Telos Seller nor Buyer shall be required to make anymaterial payments to any third parties to obtain any such consents.  If any such Non-Assignable Assets are notable to be assigned or transferred (whether because a consent in respect of anyNon-Assignable Assets could not be obtained or otherwise), (i) therelevant Telos Seller holding such Non-Assignable Asset shall use itscommercially reasonable efforts (without the expenditure, in the aggregate, ofmaterial personnel resources or any out-of-pocket payments to third parties) toprovide or cause to be provided to Buyer, to the extent permitted by ApplicableLaw, the benefits of any such Non-Assignable Asset and shall cooperate withBuyer in any reasonable arrangement designed to provide Buyer the materialbenefits intended to be assigned under such Non-Assignable Asset, includingenforcement at the cost and for the account of Buyer of any and all rights ofsuch Telos Seller against the other party thereto arising out of the breach orcancellation thereof by such other party or otherwise; (ii) each TelosSeller shall (to the extent Buyer has undertaken and performed theresponsibilities thereunder) promptly pay or cause to be paid to Buyer all moniesreceived by such Telos Seller with respect to any such Non-Assignable Asset;and (iii) (to the extent that Buyer has been provided the benefit of suchNon-Assignable Asset) the Buyer shall perform and discharge on behalf of theapplicable Telos Seller, and defend and indemnify such Telos Seller against,and hold harmless such Telos Seller from, all of such Telos Seller’sLiabilities, if any, with respect to such Non-Assignable Asset subject to andin accordance with the provisions thereof. Except as set forth in Article 9, the failure by any Telos Sellerto assign at Closing any Contract or Permit shall not relieve any of theparties hereto from its respective obligations to consummate the transactionscontemplated by this Agreement; provided however that any Non-Assignable Assetsthat are not assigned to Buyer within a reasonable period of time after theClosing and with respect to which the material benefits of such Non-AssignableAsset have not been provided to Buyer shall be deemed Excluded Assets and allLiabilities relating to or arising in connection with such Excluded Assetsshall be deemed Excluded Liabilities (except to the extent that such Liabilityconstitutes an Assumed Liability that has previously been taken into account inthe working capital adjustment contemplated by Section 2.8 hereof, inwhich event such Liability shall remain an Assumed Liability to be dischargedby Buyer).

 

2.2                                 PurchasePrice.

 

(a)                                  PurchasePrice.  The aggregate purchase pricefor the Purchased Assets shall be cash in the amount of twenty-nine millionUnited States dollars (US$29,000,000) (the “**PurchasePrice**”), subject to the holdback of certain amounts as provided inSection 2.2(b) and Section 2.3 plus the right to receive the Earnout(as defined in Section 3.1) as set forth in Article 3, in each case,as further modified by Section 2.4, Section 11.4 andSection 11.10.

 

(b)                                 InitialPayment.  On the terms and subjectto the conditions set forth in this Agreement, Buyer shall, at the Closing, paycash in the aggregate amount equal to twenty-nine million United Sates dollars(US$29,000,000) (the “**Initial Payment**”)less the Escrow Cash and the Holdback Cash by wire transfer of immediatelyavailable funds to (i)

 

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creditors of the Telos Sellers on behalf of the Telos Sellers as setforth in Schedule 2.2(b) and (ii) the remainder to the TelosSellers in such proportions as directed by Seller in writing delivered to Buyerno less than three days prior to the Closing Date to a bank account or bankaccounts designated by Seller in writing prior to the Closing.  

 

(c)                                  Allocationof Purchase Price.  After theClosing, Buyer and Seller shall, in good faith, use reasonable best efforts toallocate the sum of the Purchase Price and the Assumed Liabilities among thePurchased Assets in accordance with the principles of Section 1060 of theCode and the Treasury Regulations thereunder (the “**Purchase Price Allocation**”) and cooperate in the preparationof IRS Form 8594 (the “**Asset AcquisitionStatement**”) in accordance with the Purchase Price Allocation fortimely filing with their respective federal income Tax Returns.  Any subsequent adjustments to the sum of thePurchase Price and Assumed Liabilities shall be reflected in the Purchase PriceAllocation in a manner consistent with Section 1060 of the Code and theapplicable Treasury Regulations.  IfBuyer and Seller shall have agreed on a Purchase Price Allocation and an AssetAcquisition Statement, then Buyer and Seller shall file the Asset AcquisitionStatement in the form so agreed with the IRS and neither Buyer nor Seller shalltake a position that is inconsistent with the Purchase Price Allocation in anyfilings, declarations or reports with the IRS and such parties hereby agree tomake consistent use of such allocation for all Tax purposes, provided that, ifBuyer and Seller cannot agree to a Purchase Price Allocation, each party mayreport a Purchase Price Allocation that, in its sole discretion, is consistentwith Section 1060 of the Code and the Regulations thereunder.

 

(d)                                 Applicationof Proceeds.  Seller shall cause theTelos Sellers to use the proceeds received by the Telos Sellers pursuant toSection 2.2(b) to be used, on or after the Closing Date, the payments anddistributions as set forth in Schedule 2.2(d).  Seller shall cause the Telos Sellers to use the proceeds receivedby the Telos Sellers from the Escrow Cash, the Working Capital Adjustment Cashand the Earnout to make the payments and distributions set forth inSchedule 2.2(d) in the event the payments pursuant to Section 2.2(b)were not sufficient to satisfy all obligations set forth onSchedule 2.2(d).

 

(e)                                  Withholding.  The Buyer may deduct from the Purchase Price(including any payment of Escrow Cash or Earnout payment) any amount which isrequired to be withheld and deducted under the Code (or other applicable Taxlaw).  Any amount so withheld anddeducted shall be remitted by the Buyer to the appropriate GovernmentalAuthority on a timely basis.  The Buyershall provide to the Seller, on a timely basis, evidence that any such amounthas in fact been remitted to the appropriate Governmental Authority.

 

2.3                                 Escrow.  At the Closing, Buyer shall withhold theEscrow Cash from the cash payable pursuant to Section 2.2(b) to the TelosSellers (in an allocation to be provided in writing by Seller to Buyer prior toClosing) and deposit the Escrow Cash in an account (the “**Escrow Account**”) with an escrow agent (the“**Escrow Agent**”), in each case asset forth in the Escrow Agreement, to be held and administered according to theEscrow Agreement.  The Escrow Agent willhold and distribute the Escrow Cash in accordance with the terms and conditionsof the Escrow Agreement.  The costs andexpenses relating to the Escrow Agent will be borne solely by Buyer.  For Tax reporting and withholding purposes,all investment income earned upon the Escrow Cash shall be allocated asprovided in the Escrow Agreement.

 

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2.4                                 WorkingCapital Adjustment Cash.  At theClosing, Buyer shall withhold the Holdback Cash from the cash payable pursuantto Section 2.2(b) to the Telos Sellers and deposit the Holdback Cash plusan additional two million five hundred thousand United States dollars(US $2,500,000) (such sum, the “**WorkingCapital Adjustment Cash**”) in the Escrow Account with the EscrowAgent, to be held and administered according to the Escrow Agreement.  The Escrow Agent will hold and distributethe Working Capital Adjustment Cash in accordance with the terms and conditionsof the Escrow Agreement.  For Taxreporting and withholding purposes, all investment income earned upon theWorking Capital Adjustment Cash shall be allocated as provided in the EscrowAgreement.

 

2.5                                 TheClosing.  Subject to termination ofthis Agreement as provided in Article 10, the closing of the transactionsto consummate the Asset Purchase (the “**Closing**”)will take place at the offices of Fenwick & West LLP, 801 CaliforniaStreet, Mountain View, California at 10:00 a.m., Pacific Time as soon aspracticable, and in any event within two business days, after all of theconditions to Closing set forth in Article 8 and Article 9 (otherthan those conditions that, by their nature, can only be satisfied at theClosing) have been satisfied and/or waived in accordance with this Agreement,or at such other place, time or date as Buyer and Seller may mutually agree(the “**Closing Date**”).

 

2.6                                 Deliveryof Purchased Assets.  At theClosing, each Telos Seller shall deliver the Purchased Assets to be transferredby such Telos Seller hereunder to Buyer (or one or more subsidiaries of Buyerdesignated by Buyer) at such Telos Seller’s principal place of business or atsuch other location and times and by such other means as are agreed by theparties.  Each Telos Seller agrees todeliver and Buyer agrees to accept delivery of the Purchased Assets in anymanner reasonably acceptable to the parties which would legally minimize theincurrence of transfer, and sales and use Taxes, including the delivery of anySoftware solely in electronic form.

 

2.7                                 Post-ClosingArrangements.  Except as set forthin any other agreement between the parties hereto, at the Closing all dataprocessing, accounting, insurance, banking, personnel, legal, communicationsand other products and services provided to the Business by Telos Sellers orany of its Affiliates, including any agreements or understandings (written ororal) with respect thereto, will terminate without any further action orliability on the part of the parties thereto.

 

2.8                                 Post-ClosingPurchase Price Adjustment.

 

(a)                                  Onthe tenth (10th) business day following the completion and acceptance by eachparty hereto, in accordance with this Section 2.8, of a Final Statement(as defined below) of the Working Capital of the Business (as defined below) asof the close of business on the Closing Date:

 

#### (i)                                     if the Working Capital ofthe Business is less than $0 as of the Closing, then Buyer and Seller shallinstruct Escrow Agent to pay to the Seller (or such other Telos Seller asSeller may designate) cash in the amount of (A) the Holdback Cash less(B) the amount by which the Working Capital of the Business is less than$0; or

 

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#### (ii)                                  if the Working Capital ofthe Business is equal to or greater than $0 as of the Closing, then Buyer andSeller shall instruct Escrow Agent to pay to the Seller (or such other TelosSeller as Seller may designate) cash in an amount equal to the sum of(A) the Holdback Cash plus (B) the amount by which the WorkingCapital of the Business is more than $0, which sum shall not exceed the totalamount of the Working Capital Adjustment Cash.

 

Any portion of theWorking Capital Adjustment Cash not required to be distributed to the TelosSellers pursuant to this Section 2.8 shall be returned to Buyer and Buyerand Seller shall instruct Escrow Agent to return such funds.

 

(b)                                 TheFinal Statement shall be prepared by Seller in the following manner:

 

#### (i)                                     within thirty (30) daysafter the Closing Date, Seller shall deliver to Buyer the Final Statement,fairly and accurately presenting the Working Capital of the Business as of theclose of business on the Closing Date. The Final Statement shall be accompanied by a report setting forth acalculation, in reasonable detail, of the Working Capital of the Business, asreflected in the Final Statement, setting forth the value, determined inaccordance with GAAP, of each Current Asset and Current Liability (as suchterms are modified by Section 2.8(b)(iv));

 

#### (ii)                                  following the Closing, eachparty shall give the other party hereto and any independent auditors andauthorized representatives of such other party full access at all reasonabletimes to the properties, books, records and personnel of the Business in theirpossession, custody or control relating to periods prior to the Closing Datefor purposes of preparing, reviewing and resolving any disputes concerning theFinal Statement.  Withinforty-five (45) days following the delivery to Buyer of the FinalStatement, Buyer shall notify Seller of any dispute of any item contained inthe Final Statement, which notice shall set forth in reasonable detail thebasis for such dispute (which may be based on the failure of any asset orliability to be valued accurately or in accordance with GAAP or the omission ofany asset, or inclusion of any liability, that Buyer in good faith believesshould be included or omitted in accordance with GAAP).  If Buyer fails to notify Seller of any suchdispute within such forty-five (45) day period, the Final Statement shallbe deemed to be accepted by Buyer.  Inthe event that Buyer shall so notify Seller of any dispute, Buyer and Sellershall cooperate in good faith to resolve such dispute as promptly as possible;and

 

#### (iii)                               if Buyer and Seller areunable to resolve any such dispute within thirty (30) days of Buyer’sdelivery of such notice (the “**Resolution Period**”), then allamounts remaining in dispute shall be submitted to a “big four” independentaccounting firm (the “**Independent Accounting Firm**”) selected bySeller and Buyer within ten (10) days after the expiration of theResolution Period.  If Seller and Buyerare unable to agree on the Independent Accounting Firm, then Buyer and Sellershall each have the right to request the American Arbitration Association toappoint the Independent Accounting Firm, which shall be a firm that has not hada material relationship with Telos Sellers or Buyer and/or its Affiliateswithin the past two (2) year period prior to the Closing.  Each party agrees to execute, if requestedby the Independent Accounting Firm, an engagement letter containing customaryterms.  All fees and expenses relatingto the work, if any, to be performed by the Independent Accounting Firm shallbe borne equally by Seller and Buyer.  The Independent Accounting Firm

 

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shall act as an arbitrator to determine only those issues still indispute and shall be limited to those adjustments, if any, that need be made tothe Final Statement to comply with GAAP and the standards referred to in thisAgreement.  The Independent AccountingFirm’s determination shall be requested to be made within thirty (30) daysof its selection, shall be set forth in a written statement delivered to Sellerand Buyer and shall be final, binding and conclusive.  The Final Statement, as may be modified by the resolution of anydisputes by Buyer and Telos Sellers or by the Independent Accounting Firm, asapplicable, shall be the “**Final Statement**.”

 

#### (iv)                              The term “**WorkingCapital of the Business**” means the value of Current Assets less thevalue of Current Liabilities; provided, that, for purposes of the calculationof Working Capital of the Business (A) interest not related to the SVBCredit Agreement or accrued salary of Jack Mar and Ron McLeod shall be excludedfrom Interest Payable, (B) the effect of the payment or accrual ofTransaction Expenses shall be excluded from the value of each line itemaffected thereby, (C) the value of the Cash and Investments line item shall beincreased by the amount of the out-of-pocket cost, up to a maximum of $120,000to Seller of the directors’ and officers’ Liability Insurance purchased inaccordance with Section 7.5 and (D) the value of any Current Liability orportion thereof that is deemed an Excluded Liability pursuant toSection 2.1(f) shall be excluded from Current Liabilities.

 

#### (v)                                 The amounts, if any,referred to in Section 2.8(a) shall be delivered by the Escrow Agent bywire transfer to the Telos Sellers and/or Buyer, as applicable, in immediatelyavailable funds to an account or accounts as designated in writing by Sellerand/or Buyer as applicable.

 

ARTICLE 3EARNOUT

 

3.1                                 Earnout.  Earnout.  On the forty fifth (45th) calendar day (or next business day ifsuch calendar day is not a business day) (“**EarnoutDistribution Date**”) after June 30, 2005, Buyer shall payto Seller (or such other Tiger Sellers as Seller may designate) an amount incash (the “**Earnout**”) equal to$2.00 for each $1.00 of revenue recognized by Buyer or any of its Affiliates orSubsidiaries, as determined in accordance with GAAP and, to the extentconsistent therewith, Buyer’s revenue recognition policies applied to similarproducts and services, from the sale, license or provision of Seller Productsor Services in excess of ten million dollars ($10,000,000) during theperiod beginning on the Closing Date and ending June 30, 2005 (the “**Earnout****Period**”);providedthat no Earnout payment shall be due or payable if therecognized revenue from the sale, license or provision of Seller Products orServices during the Earnout Period is less than ten milliondollars ($10,000,000); and provided, further, that in noevent shall the Earnout exceed nineteen million United States dollars(US$19,000,000).  Solely for purposes ofdetermining the amount of recognized revenues for the purpose of determiningthe Earnout and not for GAAP reporting purposes, Buyer will be deemed to haverecognized additional revenue, in an amount not to exceed US$250,000, equal tothe amount of cash received by Buyer following the Closing Date relating toSeller Products or Services shipped prior to the Closing Date and with respectto which neither Seller nor Buyer recognized revenue (in accordance with theirrespective revenue recognition policies). The following shall be specifically excluded from the calculation ofrecognized revenue from the sale, license or provision of Seller Product orServices for the purposes of calculating the Earnout:

 

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(a) intercompany sales (sales to entities controlled by Buyer) and(b) all recognized revenue attributable to the sale, license or provisionof Buyer product or services, other than the Seller Products or Services.  With respect to any Seller Product or Servicerecalled prior to June 30, 2005, such recognized revenue shall becalculated net of any costs, and reductions in recognized revenue, or reversalsof recognized revenue resulting from such recall; provided that the foregoingshall not apply to components returned by customers in the ordinary course ofbusiness for repair or replacement pursuant to the warranty provided to suchcustomers.  For the purpose ofcalculation of the Earnout, recognized revenues with respect to the sale,license or provision of Seller Products or Services shall be calculated on thebasis of the accounting policies in effect at Buyer at the time of therecognition of the revenue to the extent consistent with GAAP.

 

3.2                                 Booksand Records; Audit or Review by Seller. During the period that the Earnout is being determined, Buyer shallmaintain books and records, internal controls and accounting systems reasonablysufficient for the purpose of determining the sale, license or provision ofSeller Products or Services, the revenue earned or accrued with respectthereto, and making all other determinations necessary for the determination ofthe Earnout.  During the Earnout Period,Seller, or a duly appointed representative of the stockholders of Seller (the “**Representative**”), may conduct a singleaudit or review of the consolidated books of Buyer, its Affiliates and itsSubsidiaries in which the information regarding revenue attributable to sales,licensing or provision of Seller Product or Services is recorded, and Buyer’srecords supporting its entries in those books, provided that such audit orreview shall be performed during normal business hours and at the place wherethose books and records are normally kept, provided that following receipt ofthe Earnout Notice (as defined in Section 3.4) until the final and bindingdetermination of the Earnout Amount in accordance with Section 3.4,Seller, or the Representative, and its respective advisers and agents shall begiven all such access as they may reasonably require to such books and recordsduring Buyer’s normal business hours, and access to any personnel orrepresentatives of Buyer and any of its Affiliates or Subsidiaries, as they mayreasonably require for the purposes of resolving any disputes regarding thedetermination of revenues during the Earnout Period and/or the calculation ofthe Earnout.  Seller, or theRepresentative, as applicable, shall bear all costs incurred by it inconnection with any such audit or review unless such audit or review reveals adeficiency in the amount of the Earnout payable to the Tiger Sellers set out inthe Earnout Notice of greater than five (5%) percent as agreed by Seller,or the Representative, as applicable, and Buyer in the resolution of anydispute pursuant to Section 3.4(b), in which event Buyer shall pay for thecosts of such audit or review, and provided further that, in the event anydispute is referred to arbitration pursuant to Section 3.4(b) and Seller,or the Representative, as applicable, is the prevailing party in such arbitration,the costs recoverable by Seller, or the Representative, as applicable, fromBuyer shall include such audit or review costs.

 

3.3                                 BuyerSales Support.  Buyer herebycovenants to act in good faith throughout the Earnout Period and thereafter forthe purposes of determining the Earnout Payment and to use its commerciallyreasonable efforts to sell, license and provide Seller Products or Servicesduring the Earnout Period consistent with the long-term business plan of Buyerin a manner that is intended to generate GAAP reportable recognized revenuesduring the Earnout Period of up to $19,500,000, provided that Buyer shall havefull freedom and flexibility with respect to decisions made in a commerciallyreasonable manner concerning marketing and development of Seller

 

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Products or Services applying those standards generally employed byBuyer when making similar decisions with respect to other product and servicelines of Buyer.  In particular, duringthe Earnout Period:

 

(i)                                     Buyershall use commercially reasonable efforts to cause the division or businessunit of Buyer primarily responsible for the operation of the Purchased Assets(the “**Seller****Product****Division**”),or any successor thereto, to continue to manufacture, sell and provide postsales support for each of the Seller Products or Services, as such SellerProducts or Services may be modified from time to time;

 

(ii)                                  Buyershall not adopt a sales commission structure for Seller Products or Servicesthat disincentivises the sale of Seller Products or Services relative to Buyerproducts or services by the Buyer’s sales employees; and

 

(iii)                               Buyer shall commitworking capital, marketing, research and development and other informationresources, personnel and facilities of Buyer or any of its Affiliates orSubsidiaries to the Seller Product Division to support the sale, licensing andprovision of Seller Products or Services on at least the same basis as suchresources are provided to other divisions, business units or product lineswithin the Buyer group.

 

3.4                                 Buyershall use commercially reasonable efforts to preserve the relationships of theBusiness with respect to customers, suppliers, licensors, licensees, anddistributors, employees and others having business dealings with any TigerSeller as of the Closing Date.

 

3.5                                 EarnoutDistributions.

 

(a)                                  EarnoutNotice.  Subject to the terms ofthis Article 3, within thirty (30) calendar days following the end ofthe Earnout Period, Buyer shall deliver to Seller (1) a memorandum (the “**Earnout Notice**”) (A) stating thedollar value of the cash to be paid pursuant to the Earnout, if any, and(B) specifying in reasonable detail Buyer’s calculation of such dollarvalue, and (C) attaching documentation demonstrating the basis for suchcalculation, and (2) payment of such amount of cash with respect to theEarnout.

 

(b)                                 SellerObjection.  Seller shall, withinthirty (30) calendar days after delivery of the Earnout Notice, deliver toBuyer in writing any objection thereto. Any such objection shall be in reasonable detail and include thespecific component or components of Buyer’s Earnout calculation indispute.  To the extent not specificallyand expressly disputed in a timely manner, Buyer’s Earnout calculation shall beconclusive and binding on Seller absent manifest error.  If Seller objects in writing to Buyer’sEarnout calculation prior to the expiration of such thirty (30) calendarday period, Buyer and Seller shall use their reasonable best efforts to resolvesuch dispute as promptly as possible. If Buyer and Seller are unable to resolve any such dispute withinthirty (30) business days of Seller’s delivery of such written objection,then all amounts remaining in dispute shall be submitted to binding arbitrationin accordance with the terms and provisions of Section 11.8(c).

 

3.6                                 Earnoutas Asset Purchase Consideration. Any Earnout payable to Seller pursuant to this Article 3 will notconstitute compensation for services but rather will constitute part of theconsideration for the Purchased Assets acquired by Buyer in the Asset Purchase.

 

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ARTICLE 4REPRESENTATIONS AND WARRANTIES OF SELLER

 

Subject to theexceptions set forth in the disclosure letter of Seller addressed to Buyer,dated as of the Agreement Date and delivered to Buyer concurrently with theparties’ execution of this Agreement (the “**SellerDisclosure Letter**”), Seller represents and warrants to Buyer as setforth below in this Article 4.  TheSeller Disclosure Letter shall be arranged in separate parts corresponding tothe numbered and lettered sections contained in this Agreement, and theinformation disclosed in any numbered or lettered part shall be deemed torelate to and to qualify the particular provision set forth in thecorresponding numbered or lettered section in this Agreement, asapplicable, and all other provisions of this Agreement to which the relevanceof such information is reasonably apparent from the text of such disclosure.

 

4.1                                 Organizationand Good Standing.  Seller is acorporation duly organized, validly existing and in good standing under thelaws of the State of Delaware and has continuously been in good standing underthe laws of the State of Delaware at all times since its inception.  Each of Seller’s Subsidiaries is acorporation duly organized, validly existing and, where the concept isapplicable, in good standing, under the laws of the jurisdiction of itsincorporation.  Telos Sellers have thecorporate power and authority to own, operate and lease its properties and tocarry on the Business.  Each TelosSeller is duly qualified or licensed to do business, and is in good standing,in each jurisdiction where the character of the properties owned, leased oroperated by it or the nature of its activities makes such qualification orlicensing necessary (each such jurisdiction being listed on Schedule 4.1of the Seller Disclosure Letter). Seller has delivered or made available to Buyer’s legal counsel true andcomplete copies of the currently effective Certificate of Incorporation andBylaws of Seller and the equivalent charter documents of each of itsSubsidiaries, each as amended to date. Neither Seller nor any of its Subsidiaries is in violation of itsArticles of Association or Memorandum of Association or Certificate ofIncorporation or Bylaws, as applicable, each as amended to date.

 

4.2                                 Subsidiaries.  Schedule 4.2(b) of the SellerDisclosure Letter lists each of Seller’s Subsidiaries as of the date hereof,each of which is wholly-owned, directly or indirectly, by Seller.  Except as set forth in Schedule 4.2(b)of the Seller Disclosure Letter, neither Seller nor any of its Subsidiariesdirectly or indirectly owns any equity or similar interest in or any interestconvertible, exchangeable or exercisable for, any equity or similar interestin, any Person.

 

4.3                                 Power,Authorization and Validity.

 

(a)                                  Powerand Authority.  Subject to approvalof the Asset Purchase and the adoption of this Agreement by (i) holders ofa majority of the outstanding shares of Seller Common Stock and SellerPreferred Stock (voting together as a single voting class on an as-converted toSeller Common Stock basis), (ii) holders of a majority of the outstandingshares of Series B Stock (voting as a separate voting class),(iii) holders of at least seventy-five percent of the outstanding sharesof Series C Stock (voting as a separate voting class), (iv) holdersof a majority of the outstanding shares of Series D Stock (voting as aseparate voting class), (v) holders of at least two-thirds of theoutstanding shares of Series E Stock (voting as a separate voting class),(vi) holders of Seller Senior Convertible Notes representing at leasttwo-thirds of the aggregate principal amount of all outstanding Seller SeniorConvertible Notes, (collectively,

 

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the “**Seller Stockholder Approval**”),and subject to obtaining the corporate approvals of each other Telos Sellerdescribed in Schedule 4.3(a) of the Seller Disclosure Letter all ofwhich have been obtained as of the date hereof, each Telos Seller has allrequisite corporate power and authority to enter into, execute, deliver andperform its obligations under this Agreement and each of the Seller AncillaryAgreements and to consummate the Asset Purchase.  The Asset Purchase and the execution, delivery and performance byeach Telos Seller of this Agreement, each of the Seller Ancillary Agreements towhich such Telos Seller is a party and all other agreements, transactions andactions contemplated to be entered into hereby or thereby by such Telos Seller,have been duly and validly approved and authorized by such Telos Seller’s Boardof Directors by unanimous vote or written consent of the entire membership ofsuch Telos Seller’s Board of Directors. Seller and the Seller Stockholders listed on Exhibit A-1have executed and delivered to Buyer the Voting Agreement under which suchSeller Stockholders have delivered a written consent under which such SellerStockholders have voted their shares of Seller Stock in favor of the AssetPurchase and the execution, delivery and performance by the Telos Sellers ofthis Agreement, each of the Seller Ancillary Agreements and all otheragreements, transactions and actions contemplated hereby or thereby, whichvotes are sufficient to obtain the Seller Stockholder Approval.

 

(b)                                 NoConsents.  No consent, approval,order or authorization of, or registration, declaration or filing with, anyGovernmental Authority, or any other Person, governmental or otherwise, isnecessary or required to be made or obtained by any Telos Seller to enable suchTelos Seller to lawfully execute and deliver, enter into, and perform itsobligations under this Agreement and each of the Seller Ancillary Agreements towhich it is a party or to consummate the Asset Purchase, except for the SellerStockholder Approval.

 

(c)                                  Enforceability.  This Agreement has been duly executed anddelivered by each Telos Seller.  ThisAgreement and each of the Seller Ancillary Agreements are, or when executed byeach Telos Seller, as applicable, shall be, valid and binding obligations ofsuch Telos Seller, enforceable against such Telos Seller in accordance withtheir respective terms, subject to the effect of (i) applicablebankruptcy, insolvency, reorganization, moratorium or other similar laws now orhereafter in effect relating to rights of creditors generally and(ii) rules of law and equity governing specific performance, injunctiverelief and other equitable remedies.

 

4.4                                 Capitalizationof Seller.

 

(a)                                  Theauthorized capital stock of Seller consists solely of 150,000,000 shares ofSeller Common Stock and 112,700,000 shares of Seller Preferred Stock consistingof 1,200,000 shares designated as Series A Stock, 4,500,000 sharesdesignated as Series B Stock, 7,000,000 shares designated as Series CStock, 30,000,000 shares designated as Series D Stock and 70,000,000shares designated as Series E Stock. A total of 9,171,307 shares of Seller Common Stock; 1,200,000 shares ofSeries A Stock, 3,520,061 shares of Series B Stock, 5,342,771 sharesof Series C Stock, 19,352,802 shares of Series D Stock and no sharesof Series E Stock are issued and outstanding as of the date hereof.  Each share of Seller Preferred Stock isconvertible into one share of Seller Common Stock.  Schedule 4.4(a) of the Seller Disclosure Letter setsforth, for issued and outstanding shares of Seller Capital Stock (i) thename of each Seller Stockholder and (ii) the numbers and kind of shares ofSeller Capital Stock held by each Seller Stockholder.  No shares of Seller Capital Stock are issued or outstanding as

 

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 of the date hereof that are notset forth on Schedule 4.4(a) of Seller Disclosure Letter.  Seller holds no treasury shares.  All issued and outstanding shares of SellerCapital Stock have been duly authorized and validly issued and are fully paidand nonassessable.

 

(b)                                 Applicationof Proceeds.  The application of theproceeds received by each Telos Seller set forth in Schedule 2.2(d) doesnot conflict with any provision of the Certificate of Incorporation or Bylawsof Seller, each as currently in effect, or the rights of any holders of SellerCapital Stock or securities, notes or other instruments convertible into or exchangeablefor Seller Capital Stock.

 

(c)                                  NoAppraisal Rights.  No holder ofSeller Capital Stock has, or after the Closing Date will have, any dissenter’sor appraisal rights under Applicable Law with respect to the transactionscontemplated by this Agreement.

 

4.5                                 NoConflict.  Except as set forth in Schedule 4.5of the Seller Disclosure Letter, neither the execution and delivery of thisAgreement or any of the Seller Ancillary Agreements by each Telos Seller, asapplicable, nor the consummation of the Asset Purchase or any other transactioncontemplated hereby or thereby, shall conflict with, or (with or without noticeor lapse of time, or both) result in a termination, breach, impairment orviolation of, or constitute a default under, or require any consent under, orgive to others any rights of termination, amendment or acceleration under:  (a) any provision of the Certificate ofIncorporation or Bylaws of Seller, in the case of Seller or the charterdocuments of such Telos Seller, in the case of any other Telos Seller, each ascurrently in effect; (b) in any material respect any Applicable Lawapplicable to such Telos Seller or any of the Purchased Assets beingtransferred by such Telos Seller hereunder; or (c) any Seller MaterialContract (as defined in Section 4.11) or any shareholder agreements orvoting agreements with respect to Seller Capital Stock to which the Seller is aparty, except, in the case of clause (c) where such conflict, termination,breach, impairment, violation, default, failure to obtain consent, or rights oftermination, amendment or acceleration, would not have a material adverseeffect on the Purchased Assets.

 

4.6                                 Litigation.  Except as set forth in Schedule 4.6of the Seller Disclosure Letter, there is no action, suit, arbitration,mediation, proceeding, claim or investigation pending against Seller or itsSubsidiaries (or, to Seller’s knowledge, against any officer, director oremployee of Seller or its Subsidiaries in their capacity as such or relating totheir employment, services or relationship with Seller or its Subsidiaries)before any Governmental Authority, arbitrator or mediator, other thancomplaints which may have been filed with a Governmental Authority but not yetserved on Seller or its Subsidiaries, nor, to the knowledge of Seller, has anysuch action, suit, arbitration, mediation, proceeding, claim or investigationbeen threatened or filed with a Governmental Authority but not yet served onSeller or its Subsidiaries.  Except asset forth in Schedule 4.6 of the Seller Disclosure Letter, there isno judgment, decree, injunction, rule or order of any Governmental Authority,arbitrator or mediator outstanding against Seller or its Subsidiaries.  Except as set forth in Schedule 4.6of the Seller Disclosure Letter, neither Seller nor any Subsidiary has anyaction, suit, arbitration, mediation, proceeding, claim or investigationpending against any Governmental Authority or other Person.

 

4.7                                 Taxes.  Except as set forth in Schedule 4.7of the Seller Disclosure Schedule, each Telos Seller (a) has properlycompleted and timely filed all foreign, federal, state, local and 

 

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municipal Tax Returns required to be filed by it, (b) has timelypaid all material amounts of Taxes required to be paid by such Seller,(c) has established an adequate accrual or reserve in accordance with GAAPfor the payment of all material amounts of Taxes payable in respect of theperiods or portions thereof prior to the Balance Sheet Date (which accrual orreserve as of the Balance Sheet Date is fully reflected on the Seller BalanceSheet), (d) has made all necessary material estimated Tax payments, and(e) has no Liability for material amounts of Taxes in excess of the amountso paid or accruals or reserves so established except for Taxes subsequent tothe Balance Sheet Date incurred in the ordinary course of business.  Each Telos Seller has not been a member of aconsolidated, combined, unitary or aggregate group for Tax purposes (other thanthe group for which Seller is currently the common parent).  All Tax Returns in respect of which materialamounts of Taxes are shown to be payable are true, correct and complete in allmaterial respects, and Seller has provided Buyer with copies of such TaxReturns.  Neither Seller nor any of itsSubsidiaries is delinquent in the payment of any material Tax or in the filingof any Tax Returns, and no deficiencies for any Tax have been threatened,claimed, proposed or assessed against Seller or any of its Subsidiaries or anyof its respective officers, employees or agents in their capacity as such.  Neither Seller nor any of its Subsidiarieshas received any written notification from the Internal Revenue Service or anyother taxing agency or Governmental Authority regarding any material issuesthat (a) are currently pending before the Internal Revenue Service or anyother taxing agency or Governmental Authority (including any sales or usetaxing agency) regarding Seller or its Subsidiaries, or (b) have been raisedby the Internal Revenue Service or other taxing agency or GovernmentalAuthority and not yet finally resolved. No Tax Return of Seller or its Subsidiaries is under audit by theInternal Revenue Service or any other taxing agency or Governmental Authorityand any such past audits (if any) have been completed and fully resolved to thesatisfaction of the applicable taxing agency or Governmental Authorityconducting such audit and all Taxes determined by such audit to be due fromSeller or its Subsidiaries have been paid in full to the applicable taxingagencies or Governmental Authorities. No Tax liens are currently in effect against any of the Purchased Assetsother than liens that arise by operation of law for Taxes not yet due andpayable, for which reserves have been established in accordance with GAAP.  There is not in effect any waiver by Selleror its Subsidiaries of any statute of limitations with respect to any Taxes norhas Seller agreed to any extension of time for filing any Tax Return that hasnot been filed.  Each Telos Seller hascomplied (and until the Closing Date will comply) with all Applicable Lawrelating to the payment and withholding of Taxes (including withholding ofTaxes pursuant to Sections 1441, 1442, 1445 and 1446 of the Code orsimilar provisions under any foreign law), has, within the time and in themanner prescribed by law, withheld from employee wages and paid over to theproper taxing agencies and Governmental Authorities all amounts required to beso withheld and paid over under all Applicable Law (including Federal InsuranceContribution Act, Medicare, Federal Unemployment Tax Act and relevant stateincome and employment Tax withholding laws), including federal and state incomeTaxes, and has timely filed all withholding Tax Returns.

 

4.8                                 SellerFinancial Statements; Undisclosed Liability.

 

(a)                                  SellerFinancial Statements.  Schedule 4.8(a)of the Seller Disclosure Letter includes the Seller Financial Statements.  The Seller Financial Statements:  (i) derived from and are in accordance withthe books and records of Seller; (ii) fairly present the consolidated financial condition of Seller at the datestherein indicated and the consolidated

 

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results of operations and cash flows of Seller for the periods thereinspecified (subject, in the case of unaudited interim period financialstatements, to normal recurring year-end audit adjustments), and(iii) have been prepared in accordance with GAAP applied on a basisconsistent with prior periods (except that any Seller Financial Statements thatare unaudited do not have notes thereto and are subject to normal recurringyear-end audit adjustments).  Allreserves established by Seller that are set forth in or reflected in the SellerBalance Sheet have been established in accordance with GAAP.  The 2003 Audited Financial Statements (asdefined in Section 6.13):  (i) willbe derived from and will be in accordance with the books and records of Seller;(ii) will fairly present the consolidated financial condition of Seller atthe dates therein indicated and the consolidated results of operations and cashflows of Seller for the periods therein specified and (iii) will beprepared in accordance with GAAP applied on a basis consistent with prior periods.

 

(b)                                 UndisclosedLiabilities.  Except as set forth inSchedule 4.8(b) of the Seller Disclosure Letter, no Telos Sellerhas any Liability, except for those (i) shown on the Seller Balance Sheet,(ii) that were incurred after the Balance Sheet Date in the ordinarycourse of such Telos Seller’s business consistent with its past practices andwhich have not had and would not reasonably be expected to have a MaterialAdverse Effect on Seller, (iii) that are not required to be set forth inthe Seller Balance Sheet under GAAP, or (iv) as otherwise disclosed hereinor on the Seller Disclosure Letter or the Seller Financial Statements.

 

(c)                                  AccountsReceivable.  All accounts receivableof the Telos Sellers included in the Purchased Assets are, to the Seller’s knowledge,valid receivables subject to no setoffs, and are, to the Seller’s knowledge,current and collectible subject in each case only to the reserve for bad debtsset forth on the face of the Seller Balance Sheet as such reserve may beadjusted with respect to operation of the Business and transactions enteredinto through the Closing Date in accordance with past practice of the TelosSellers.

 

(d)                                 Inventories.  The inventories of the Telos Sellers are ingood and merchantable condition in all material respects, are suitable andusable for the purposes for which they are intended and are in a condition suchthat they can be sold in the ordinary course of the business of the TelosSellers consistent with past practice. Each Telos Seller has good and marketable title to its inventories, ifany, free and clear of all Encumbrances other than Permitted Encumbrances.

 

(e)                                  Competition.  Seller hereby represents and warrants that(i) Seller does not have (1) annual net sales of $10 million ormore as stated on Seller’s last regularly prepared annual statement of incomeand expense or (2) total assets of $10 million or more as stated onthe last regularly prepared balance sheet of Seller; (ii) the annualstatement and balance sheet referenced in this paragraph include the annual netsales and total assets of all entities included within the Seller; and(iii) such annual statement and balance sheet have been preparedconsistent with past practice (including without limitation, with respect toaccounting principles) of Seller and have been prepared within 15 months priorto the date of execution of this agreement.

 

4.9                                 Title toProperties.  Except as set forth in Schedule 4.9(i)of the Seller Disclosure Letter, Telos Sellers have good and marketable titleto all of the Purchased Assets, free and clear of all Encumbrances, other thanPermitted Encumbrances.  Except as setforth in Schedule 4.9(i)

 

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of the Seller Disclosure Letter, the Telos Sellers have the completeand unrestricted corporate power and unqualified right to sell, transfer,convey, assign and deliver the Purchased Assets to the Buyer without monetarypenalty.  Except as set forth in Schedule 4.9(i)of the Seller Disclosure Letter, following the consummation of the transactionscontemplated by this Agreement and the execution of the instruments of transfercontemplated by this Agreement, the Buyer will acquire good and marketabletitle to all of the Purchased Assets, free and clear of all Encumbrances, otherthan Permitted Encumbrances, and without incurring any monetary penalty.  Notwithstanding the foregoing in thisSection 4.9, the representations and warranties of this Section 4.9do not extend to Encumbrances arising out of or relating to any IntellectualProperty, or rights related thereto, which Intellectual Property and relatedrights shall instead be governed by the representations and warranties ofSeller set forth in Section 4.13 below. All properties used in the operations of the Business are reflected onthe Seller Balance Sheet to the extent required under GAAP to be soreflected.  All Purchased Assetsconsisting of machinery, vehicles, equipment and other tangible personalproperty are in good condition and repair, normal wear and tear excepted.  Schedule 4.9(ii) of the SellerDisclosure Letter lists all real property leased by the Seller and itsSubsidiaries.  Seller or one of itsSubsidiaries is in peaceful and undisturbed possession of each such parcel ofleased real property and there are no contractual or legal restrictions thatpreclude or restrict the ability to use such leased real property for thepurposes for which it is currently being used. All leases of real or personal property to which Seller or any of itsSubsidiaries is a party are, to Seller’s knowledge, in full force andeffect.  To Seller’s knowledge, neitherSeller nor any of its Subsidiaries is in violation of any zoning, building,safety or environmental ordinance, regulation or requirement or other law orregulation applicable to the operation of the Purchased Assets, nor has Sellerreceived any written notice of violation of law with which it or any of itsSubsidiaries has not complied.  NeitherSeller nor any of its Subsidiaries owns any real property.  Schedule 4.9(iii) of the SellerDisclosure Letter sets forth all tangible Purchased Assets owned or leased bySeller or its Subsidiaries with an individual value of $50,000 or greater.  To Seller’s knowledge, Telos Sellers haveaccess, on commercially reasonable terms, to all products and servicesreasonably necessary to carry on the Business. The Purchased Assets and the Excluded Assets constitute all of theassets and properties used by Seller in the conduct of the Business.

 

4.10                           Absenceof Certain Changes.  Except as set forthin Schedule 4.10 of the Seller Disclosure Letter, since the BalanceSheet Date, Seller has operated its business in the ordinary course consistentwith its past practices, and since such date there has not been with respect toSeller (together with its Subsidiaries) any:

 

(a)                                  MaterialAdverse Change;

 

(b)                                 amendmentor change in Seller’s Certificate of Incorporation or Bylaws or theorganizational documents of any other Telos Seller;

 

(c)                                  incurrence,creation or assumption of (i) any Encumbrance on any of its materialassets or properties (other than Permitted Encumbrances), (ii) anymaterial Liability or any indebtedness for borrowed money (other than theissuance of Seller Convertible Notes), or (iii) any Liability as aguarantor or surety with respect to the obligations of others;

 

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(d)                                 payment or dischargeof any Encumbrance on any of its material assets or properties, or payment ordischarge of any of its material Liabilities (other than the issuance of SellerConvertible Notes), in each case that was not either shown on the SellerBalance Sheet or incurred in the ordinary course of its business after theBalance Sheet Date in an amount not in excess of $75,000 for any singleLiability to a particular creditor;

 

(e)                                  purchase,license, sale, grant, assignment or other disposition or transfer, or anyagreement or other arrangement for the purchase, license, sale, assignment orother disposition or transfer, of any of its material assets (including SellerIP Rights (as defined in Section 4.13(a)) and other intangible assets),properties or goodwill other than the sale or nonexclusive license of itsproducts to its customers in the ordinary course of its business consistentwith its past practices;

 

(f)                                    damage,destruction or loss of any material property or material asset, whether or notcovered by insurance, having a Material Adverse Effect;

 

(g)                                 declaration,setting aside or payment of any dividend on, or the making of any otherdistribution in respect of, its capital stock, or any split, combination orrecapitalization of its capital stock or any direct or indirect redemption,purchase or other acquisition of any of its capital stock or any change in anyrights, preferences, privileges or restrictions of any of its outstandingsecurities (other than repurchases of stock in accordance with the SellerOption Plan or applicable Contracts in connection with the termination ofservice of employees or other service providers or as contemplated herein);

 

(h)                                 changeor increase in the compensation payable or to become payable to any of itsofficers or employees, or in any bonus, pension, severance, retention,insurance or other benefit payment or arrangement (including stock awards,stock option grants, stock appreciation rights or stock option grants) made toor with any of such officers or employees (other than increases in the basesalaries that do not exceed 20% of such base salaries);

 

(i)                                     changewith respect to its management, supervisory or other key personnel, or anylabor dispute or claim of unfair labor practices;

 

(j)                                     enteringinto, amendment of, relinquishment, termination or nonrenewal by it of anymaterial Contract, other than in the ordinary course of its business consistentwith its past practices, or any default by it under any such material Contract;

 

(k)                                  enteringinto by it of any transaction, contract, agreement, arrangement, commitment orundertaking that by its terms requires or contemplates a current and/or futurefinancial commitment, expense (inclusive of overhead expense) or obligation onits part that involves in excess of $75,000 or that is not entered into in theordinary course of its business consistent with its past practices;

 

(l)                                     exceptfor the letter of intent between Buyer and Seller and dated as ofApril 6, 2004 relating to the transactions contemplated by thisAgreement, making or entering into any Contract with respect to anyacquisition, sale or transfer of any Purchased Asset or any stock of any TelosSeller;

 

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(m)                               announcementof or any entry into any Contract to do any of the things described in thepreceding clauses (a) through (m) (other than agreements with Buyer andits representatives regarding the transactions contemplated by this Agreement).

 

4.11                           Contracts,Agreements, Arrangements, Commitments and Undertakings.  Schedules 4.11(a)-(k) of the SellerDisclosure Letter set forth a list of each of the following Contracts to whichSeller or any of its Subsidiaries is a party or to which Seller or any of itsassets or properties is bound and that is currently in effect (each a “**Seller Material Contract**”):

 

(a)                                  anyContract providing for payments (whether fixed, contingent or otherwise) by orto it in an aggregate amount of $50,000 or more in 2004 or any year thereafter;

 

(b)                                 anyContract for or relating to the employment by it of any director, officer,employee or consultant, or any other type of Contract with any of itsdirectors, officers, employees or consultants that is not terminable by itwithin 60 days without cost or other Liability other than severance inaccordance with Seller’s severance policies as set forth in Schedule 4.11(b);

 

(c)                                  anyindenture, mortgage, trust deed, promissory note, loan agreement, security agreement,guarantee or other Contract for or with respect to the borrowing of money, aline of credit, any currency exchange, commodities or other hedgingarrangement, or a leasing transaction of a type required to be capitalized inaccordance with Statement of Financial Accounting Standards No. 13 of theFinancial Accounting Standards Board;

 

(d)                                 anylease or other Contract under which it is lessee of or holds or operates anymaterial items of tangible personal property or real property owned by anythird party;

 

(e)                                  anyContract with a Significant Customer (as defined in Section 4.23(a)) orSignificant Supplier (as defined in Section 4.23(b));

 

(f)                                    anyContract for the future purchase, sale, license, provision or manufacture ofproducts, materials, supplies, equipment or services requiring payment to orfrom it in an amount in excess of $50,000;

 

(g)                                 anymaterial dealer, distributor, OEM (original equipment manufacturer), VAR (valueadded reseller), sales representative or similar Contract under which any thirdparty is authorized to sell, sublicense, lease, distribute, market or takeorders for any of its products, services or technology;

 

(h)                                 anyContract that restricts it from engaging in the Business; from participating orcompeting in any line of business or market; from freely setting prices for itsproducts, services or technologies (including most favored customer pricingprovisions) or from engaging in the Business in any market or geographic area;

 

(i)                                     anySeller IP Rights Agreement (as defined in Section 4.13(b));

 

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(j)                                     anymaterial Contract in which any of its officers or directors, or anystockholders of Seller, or any member of their immediate families, is directlyor indirectly interested; or

 

(k)                                  anyContract with a Governmental Authority or any Governmental Permit (as definedin Section 4.14(b)).

 

A true andcomplete copy of each agreement or document required by these subsections(a)-(k) of this Section 4.11 to be listed on Schedule 4.11 ofthe Seller Disclosure Letter has been delivered or made available to Buyer’slegal counsel.  All Seller MaterialContracts are in written form.

 

4.12                           NoDefault; No Restrictions.

 

(a)                                  (i) EachSeller Material Contract is a legal, valid and binding agreement in accordancewith its respective terms; (ii) except as set forth in Schedule 4.12(a)(ii)of the Seller Disclosure Letter, no Telos Seller has received any claim ofmaterial default under or cancellation of any Seller Material Contract and noTelos Seller is in breach or violation of, or default under, any SellerMaterial Contract in any material respect; (iii) to the Seller’sknowledge, as of the date of this Agreement, no other party is in breach orviolation of, or default under, any Seller Material Contract in any materialrespect; and (iv) neither the execution of this Agreement nor theconsummation of any transactions contemplated by this Agreement shallconstitute a default under, give rise to cancellation rights under, orotherwise materially adversely affect any of the rights of the Telos Sellersunder any Seller Material Contract.

 

(b)                                 Exceptas listed in Schedule 4.11(h) of the Seller Disclosure Letter,neither Seller nor any of its Subsidiaries is a party to, and no materialPurchased Asset is bound or affected by, any judgment, injunction, order,decree, Contract (noncompete or otherwise) that restricts or prohibits, orpurports to restrict or prohibit, Seller or, following the Closing, Buyer, fromfreely engaging in the Business or from competing anywhere in the world(including any judgments, injunctions, orders, decrees, Contracts restrictingthe geographic area in which Seller or its Subsidiaries may sell, license,market, distribute or support any products or technology or provide services orrestricting the markets, customers or industries that Seller or itsSubsidiaries may address in operating the Business or restricting the pricesthat Seller or its Subsidiaries may charge for its products, technology orservices (including most favored customer pricing provisions)).

 

4.13                           IntellectualProperty.

 

(a)                                  Exceptas set forth in Schedule 4.13(a) of the Seller Disclosure Letter,to Seller’s knowledge, Seller or one of its Subsidiaries (i) owns and hasindependently developed or (ii) has the valid right or license to use, possess,develop, sell, license, copy, distribute, market, advertise and/or dispose ofall Intellectual Property used in the conduct of the Business in the samemanner as such Intellectual Property is used in the Business as of Closing(such Intellectual Property being hereinafter collectively referred to as the “**Seller IP Rights**”).  Other than rights related to third partypatents, trademarks, service marks and applications therefor, the Seller IPRights include all of the Intellectual Property used in the conduct of thebusiness as of the

 

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Closing, and to the Seller’s knowledge, there is no other IntellectualProperty (including rights related to third party patents, trademarks, servicemarks and applications therefor) necessary for such conduct of the Business asof the Closing.  As used in thisAgreement, “**Seller-Owned IP Rights**”means Seller IP Rights that are owned or exclusively licensed to Seller; and “**Seller-Licensed IP Rights**” means Seller IPRights that are not Seller-Owned IP Rights and are licensed to Seller by athird party on a non-exclusive basis.

 

(b)                                 Exceptas set forth in Schedule 4.13(b) of the Seller Disclosure Letter,neither the execution, delivery and performance of this Agreement or the SellerAncillary Agreements nor the consummation of the Asset Purchase and the othertransactions contemplated by this Agreement and/or by the Seller AncillaryAgreements shall, in accordance with their terms:  (i) constitute a material breach of or default under anyinstrument, license or other Contract governing any Seller IP Right(collectively, the “**Seller IP RightsAgreements**”); (ii) cause the forfeiture or termination of, orgive rise to a right of forfeiture or termination of, any Seller IP Right; or(iii) pursuant to the terms of any Assumed Contract, materially impair theright of Seller or, following the Closing, of Buyer to use, possess, sell orlicense any Seller IP Right or portion thereof.  Except as set forth in Schedule 4.13(b) of the SellerDisclosure Letter, there are no royalties, honoraria, fees or other paymentspayable by Seller in excess of $10,000 to any particular third person (otherthan salaries payable to employees and independent contractors not contingenton or related to use of their work product) under any Seller IP RightsAgreements as a result of the ownership, use, possession, license-in, sale,marketing, advertising or disposition of any Seller IP Rights by Seller andnone shall become payable as a result of the consummation of the transactionscontemplated by this Agreement.  Exceptas set forth in Schedule 4.13(b) of the Seller Disclosure Letter,after the Closing, all Seller-Owned IP Rights will be fully transferable,alienable or licensable by Buyer without restriction and without payment of anykind to any third party.

 

(c)                                  Schedule 4.13(c)-1of the Seller Disclosure Letter sets forth a list (by name and version number)of each of the Seller Products or Services. Except as set forth in Schedule 4.13(c)-2 of the SellerDisclosure Letter, to the knowledge of Seller, neither the operation of theBusiness nor the use, development, manufacture, marketing, license, sale,furnishing or intended use of any Seller Product or Service within the scope ofthe Business (i) violates any Assumed Contract or (ii) infringes,misappropriates or otherwise violates any Intellectual Property right of anyother party.  Except as set forth in Schedule 4.13(c)-3of the Seller Disclosure Letter, there is no pending (other than complaintsthat may have been filed with a Governmental Authority, have not yet beenserved on Seller or its Subsidiaries and with respect to which Seller and itsSubsidiaries have no knowledge), or to the knowledge of Seller, threatenedclaim or litigation brought against Seller or its Subsidiaries(i) contesting the validity, ownership or right of Seller or itsSubsidiaries to exercise any Seller IP Right; (ii) asserting that anySeller IP Right, or the use, sale, license or disposition thereof in theBusiness, conflicts with, misappropriates, infringes or otherwise violates, orshall conflict with, or misappropriate, infringe or otherwise violate, theIntellectual Property rights of any other party, and neither Seller nor any ofits Subsidiaries has received any written notice from any third party allegingany of the foregoing or offering a license under any such third partypatents.  Except as set forth in Schedule 4.13(c)-4of the Seller Disclosure Letter, neither Seller nor any of its Subsidiaries issubject to any pending proceeding or outstanding order, contract or stipulationrestricting in any manner the use, distribution, transfer, or licensing bySeller or its Subsidiaries of any

 

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 Seller-Owned IP Rights or anySeller Product or Service or any Seller-Licensed IP Rights or that may affectthe validity, use or enforceability of any such Seller-Owned IP Rights, orrestricting the conduct of the Business in order to accommodate Intellectual Propertyrights of a third party.

 

(d)                                 Exceptas set forth in Schedule 4.13(d) of the Seller Disclosure Letter,to the knowledge of Seller, no current or former employee, consultant orindependent contractor of Seller or its Subsidiaries:  (i) is in material violation of any term or covenant of anyemployment contract, patent disclosure agreement, invention assignmentagreement, nondisclosure agreement, noncompetition agreement or any otherContract with any other party by virtue of such employee’s, consultant’s orindependent contractor’s being employed by, or performing services for, Selleror using trade secrets or proprietary information of others without permission;or (ii) has developed any technology, software or other copyrightable,patentable or otherwise proprietary work for Seller or its Subsidiaries that issubject to any Contract under which such employee, consultant or independentcontractor has assigned or otherwise granted to any third party any rights(including Intellectual Property) in or to such technology, software or othercopyrightable, patentable or otherwise proprietary work.  To Seller’s knowledge, neither theemployment of any employee of Seller or its Subsidiaries, nor the use by Selleror its Subsidiaries of the services of any consultant or independent contractorsubjects Telos Sellers to any Liability to any third party for improperlysoliciting such employee, consultant or independent contractor to work forSeller or such Subsidiary, whether such Liability is based on contractual or otherlegal obligations to such third party.

 

(e)                                  TelosSellers have taken all reasonable steps consistent with industry practices toprotect, preserve and maintain the secrecy and confidentiality of the Seller IPRights and to preserve and maintain all trade secrets in the Seller IPRights.  Except as set forth in Schedule 4.13(e)-1of the Seller Disclosure Letter, all current and former officers, employees,consultants and independent contractors of Telos Sellers having access toproprietary information of Seller or its Subsidiaries, its customers orbusiness partners have executed and delivered to Seller an agreement regardingthe protection of such proprietary information (in the case of proprietaryinformation of Seller’s customers and business partners, to the extent requiredby such customers and business partners); and copies of all such agreementshave been delivered to Buyer’s legal counsel. Except as set forth in Schedule 4.13(e)-1 of the SellerDisclosure Letter, Seller has secured valid written assignments from all ofSeller’s and its Subsidiaries’ current and former consultants, independentcontractors and employees who were involved in, or who materially contributedto, the creation or development of any Seller-Owned IP Rights, of the rights tosuch contributions that may be owned by such persons or that Seller or itsSubsidiaries does not already own by operation of law.  No current or former employee, officer,director, consultant or independent contractor of Seller or its Subsidiarieshas any right, license, claim or interest whatsoever in or with respect to anySeller-Owned IP Rights.  Except as setforth in Schedule 4.13(e)-2 of the Seller Disclosure Letter, to theextent that any technology, software or Intellectual Property developed or otherwiseowned by a third party is incorporated into, integrated or bundled by Seller orits Subsidiaries with any of the Seller Products or Services (“**Third Party Product Technology**”), Sellerhas a valid, written agreement with such third party with respect theretopursuant to which Seller either (i) has obtained complete, unencumberedand unrestricted ownership of, and is the exclusive owner of, or (ii) hasobtained perpetual, irrevocable, non terminable licenses (sufficient for theconduct of the Business) to, all such third party’s Intellectual Property insuch Third Party Product Technology.

 

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Schedule 4.13(e)-3 of the SellerDisclosure Letter sets forth a list and description of all Third Party ProductTechnology.

 

(f)                                    Schedule 4.13(f)of the Seller Disclosure Letter contains a true and complete list of(i) all Seller-Owned IP Rights in the form of worldwide registrations madeby or on behalf of any Telos Seller of any patents, copyrights, mask works, trademarks,service marks, Internet domain names or Internet or World Wide Web URLs oraddresses with any Governmental Authority or quasi-governmental authority,including Internet domain name registries, (ii) all Seller-Owned IP Rightsin the form of applications, registrations, filings and other formal writtengovernmental actions made or taken pursuant to Applicable Law by any TelosSeller to secure, perfect or protect its interest in the Seller IP Rights,including all patent applications, copyright applications, mask workapplications and applications for registration of trademarks and service marks,and where applicable the jurisdiction in which each of the items of the SellerIP Rights has been applied for, filed, issued or registered, and (iii) allinter parties proceedings or actions before any court or tribunal (includingthe United States Patent and Trademark Office) or equivalent authority anywhereelse in the world) related to any of the Seller-Owned IP Rights that are ownedby Seller.  One of the Telos Sellers isthe record owner of each registered patent, trademark, service mark, Internetdomain name, Internet or World Wide Web URL or address, copyright and mask workright held by Seller or its Subsidiaries and such registrations are subsistingand, to the Seller’s knowledge, are valid and enforceable.

 

(g)                                 TelosSellers exclusively own all right, title and interest in and to allSeller-Owned IP Rights free and clear of all Encumbrances and licenses (otherthan licenses and rights listed in Schedule 4.13(g)-1 of the SellerDisclosure Letter and Permitted Encumbrances). The right, license and interest of Seller or its Subsidiaries in and toall Seller-Licensed IP Rights are free and clear of all Encumbrances andlicenses (except as set forth in the applicable terms and conditions of theagreements under which the corresponding Seller-Licensed IP Rights werelicensed to Seller or its Subsidiaries and such other than licenses and rightslisted in Schedule 4.13(g)-2 of the Seller Disclosure Letter and PermittedEncumbrances).

 

(h)                                 Schedule 4.13(h)-1of the Seller Disclosure Letter contains a true and complete list of alllicenses, sublicenses and other Contracts as to which Seller or itsSubsidiaries is a party and pursuant to which any Person is authorized to useany Seller-Owned IP Rights.  Schedule 4.13(h)-2of the Seller Disclosure Letter contains a true and complete list of alllicenses, sublicenses and other Contracts as to which Seller or itsSubsidiaries is a party and pursuant to which Seller or its Subsidiaries isauthorized to use the Seller-Licensed IP Rights (other than licenses ofsoftware generally available to the public at a per copy license fee of lessthan $1,000 per copy).

 

(i)                                     NeitherSeller nor any other party acting on its behalf has disclosed or delivered toany party, or permitted the disclosure or delivery to any escrow agent or otherparty of, any Seller Source Code (as defined below).  No event has occurred, and no circumstance or condition exists,that (with or without notice or lapse of time, or both) shall result in thedisclosure or delivery by Seller or any other party acting on its behalf to anyparty of any Seller Source Code.  Schedule 4.13(i)of the Seller Disclosure Letter identifies each Contract pursuant to which Sellerhas deposited, or is or may be required to deposit, with an escrow agent orother party, any Seller Source Code and further describes whether the executionof this Agreement or

 

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the consummation of the Asset Purchase or any of the other transactionscontemplated by this Agreement, in and of itself, would result in the releasefrom escrow of any Seller Source Code. As used in this Section 4.13(i), “**SellerSource Code**” means, collectively, any human readable software sourcecode, or any material portion or aspect of the software source code, thatconstitutes Seller-Owned IP Rights.

 

(j)                                     Exceptas set forth in Schedule 4.13(j)-1 of the Seller Disclosure Letter,to Seller’s knowledge, there is no unauthorized use, disclosure, infringementor misappropriation of any Seller-Owned IP Rights by any third party, includingany current or former employee of Seller or its Subsidiaries.  Except as set forth in Schedule 4.13(j)-2of the Seller Disclosure Letter, neither Seller nor its Subsidiaries has agreedto indemnify any person for any infringement, misappropriation, dilution,conflict with or other violation of any Intellectual Property of any thirdparty with respect to any Seller Product or Service that has been sold,licensed to third parties, leased to third parties, supplied, marketed,distributed or provided by Seller or its Subsidiaries (other than pursuant toits standard customer agreement, the form of which is included in Schedule 4.13(j)-2of the Seller Disclosure Letter).

 

(k)                                  Exceptas set forth in Schedule 4.13(k) of the Seller Disclosure Letter,all software developed by Seller or its Subsidiaries and licensed by Seller orits Subsidiaries to customers and all Seller Products or Services provided by orthrough Seller or its Subsidiaries to customers on or prior to the Closing Dateconform in all material respects to applicable contractual commitments, expressand implied warranties (to the extent not expressly disclaimed in Contractswith such customers), product specifications and product Documentation and toany representations provided to customers, and neither Seller nor any of itsSubsidiaries has any material Liability for replacement or repair thereof orother damages in connection therewith in excess of any reserves thereforreflected on the Seller Balance Sheet. Seller has not had any of its products returned by a purchaser thereofexcept for normal warranty returns consistent with past history and thosereturns that would not result in a reversal of any material revenue by Seller.

 

(l)                                     Exceptas set forth in Schedule 4.13(l) of the Seller Disclosure Letter,no government funding, facilities of a university, college, other educationalinstitution or research center, was used in the development of the SellerProducts or Services, computer software programs or applications owned bySeller.  To Seller’s knowledge, nocurrent or former employee, consultant or independent contractor of Seller orits Subsidiaries who was involved in, or who contributed to, the creation ordevelopment of any Seller-Owned IP Rights has performed services for thegovernment, for a university, college or other educational institution or for aresearch center during a period of time during which such employee, consultant orindependent contractor was also performing services for Seller or itsSubsidiaries.

 

(m)                               Exceptas set forth in Schedule 4.13(m) of the Seller Disclosure Letter,no software developed by Seller or its Subsidiaries or covered by anySeller-Owned IP Right that is owned by Seller has been distributed in whole orin part or developed with or used with any Public Software by Seller or itsSubsidiaries in a manner that would require such software to be disclosed ordistributed in source code form or made available at no charge.  As used in this Section 4.13(m), “**Public Software**” means any software that(i) contains, or is derived in any manner (in whole or in part) from, anysoftware that is distributed as free software, open source

 

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software (e.g., Linux) or (ii) requires as a condition of its use,modification or distribution that it be disclosed or distributed in source codeform or made available at no charge. Public Software includes without limitation software licensed under theGNU’s General Public License (GPL) or Lesser/Library GPL, the Mozilla PublicLicense, the Netscape Public License, the Sun Community Source License, the SunIndustry Standards License, the BSD License, and the Apache License.

 

4.14                           Compliancewith Laws.

 

(a)                                  EachTelos Seller has complied, and is now and at the Closing Date shall be incompliance, in all material respects with all Applicable Law.

 

(b)                                 EachTelos Seller hold all material permits, licenses and approvals from, and has madeall material filings with, government (and quasi-governmental) agencies andauthorities, that are necessary and/or legally required to be held by it toconduct the Business without any violation of Applicable Law (“**Governmental Permits**”), the lack of whichwould have a Material Adverse Effect. Neither Seller nor any of its Subsidiaries has received any writtennotice from any Governmental Authority regarding (i) any violation of lawor any Governmental Permit or any failure to comply with any term or requirementof any Governmental Permit or (ii) any revocation, withdrawal, suspension,cancellation, termination or modification of any Governmental Permit.

 

(c)                                  NeitherSeller nor, to Seller’s knowledge, any Subsidiary, director, officer oremployee of Seller has, for or on behalf of Seller, (i) used any funds forunlawful contributions, gifts, entertainment or other unlawful expensesrelating to political activity, (ii) made any unlawful payment to foreignor domestic government officials or employees or to foreign or domesticpolitical parties or campaigns or violated any provision of the Foreign CorruptPractices Act of 1977, as amended, or (iii) made any other payment inviolation of Applicable Law.

 

4.15                           CertainTransactions and Agreements.  Exceptas set forth in Schedule 4.15 of the Seller Disclosure Letter, tothe knowledge of Seller, none of the officers, directors or employees of Sellernor any member of their immediate families has any direct ownership interest inany firm or corporation that competes with, or does business with, or has anycontractual arrangement with, Seller or any of its Subsidiaries (except withrespect to any interest in less than 1% of the stock of any corporation whosestock is publicly traded).  Except asset forth in Schedule 4.15 of the Seller Disclosure Letter, none ofsaid officers, directors, employees or stockholders or any member of theirimmediate families, is a party to, or otherwise directly or indirectlyinterested in, any Contract with Seller or any Subsidiary, except for normalcompensation for services as an officer, director or employee thereof that havebeen disclosed to Buyer.  None of saidofficers, directors, employees, stockholders or immediate family members has anyinterest in any property, real or personal, tangible or intangible (includingany Seller IP Rights or any other Intellectual Property), that is used in, orthat pertains to, the Business, except for the rights of a stockholder underApplicable Law.

 

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4.16                           Employees,ERISA and Other Compliance.

 

(a)                                  EachTelos Seller is in compliance in all material respects with all Applicable Lawand Contracts relating to employment, employment practices, immigration, wages,hours, and terms and conditions of employment, including employee compensationmatters.  A complete list of allemployees, officers and consultants of Telos Sellers and their current titleand/or job description, compensation has been delivered to Buyer and itscounsel.  All employees of Telos Sellersare legally permitted to be employed by Seller in the jurisdiction in whichsuch employee is employed in their current job capacities for the maximumperiod allowed under Applicable Law. Except as set forth in Schedule 4.16(a)-2 of the Seller DisclosureLetter, neither Seller nor any of its Subsidiaries has any employment orconsulting Contracts currently in effect that are not terminable within 60 dayswithout penalty (other than agreements with the sole purpose of providing forthe confidentiality of proprietary information or assignment of inventions).

 

(b)                                 NoTelos Seller (i) is now, or has ever been, subject to a union organizingeffort, (ii) is subject to any collective bargaining agreement withrespect to any of its employees, and (iii) is subject to any otherContract with any trade or labor union, employees’ association or similarorganization, and (iv) has current labor disputes with any trade or laborunion, employees’ association or similar organization.  Telos Sellers have good labor relations, andSeller has no knowledge of any facts indicating that the consummation of theAsset Purchase or any of the other transactions contemplated hereby shall havea material adverse effect on such labor relations.

 

(c)                                  NoTelos Seller (or ERISA Affiliate thereof) maintains or contributes to, or hasever maintained or contributed to, any “pension plan” within the meaning ofSection 3(2) of ERISA or any retiree welfare plan.

 

(d)

 

(i)                                     Schedule 4.16(d)of the Seller Disclosure Letter lists each material employment, consulting,severance or other similar Contract, each “employee welfare benefit plan” asdefined in Section 3(1) of ERISA and each plan or arrangement (written ororal) providing for insurance coverage, workers’ benefits, vacation benefits, severancebenefits, disability benefits, death benefits, hospitalization benefits,retirement benefits, deferred compensation, profit-sharing, bonuses, stockoptions, stock purchase, phantom stock, stock appreciation or other forms ofincentive compensation or post-retirement insurance, compensation or benefitsfor employees, consultants or directors that is entered into, maintained orcontributed to by any Telos Seller or any ERISA Affiliate and covers anyemployee of Seller or its Subsidiaries. Such Contracts, plans and arrangements as are described in thisSection 4.16(d) are hereinafter collectively referred to as “**Seller Benefit Arrangements**.”

 

(ii)                                  EachSeller Benefit Arrangement has been maintained in compliance in all materialrespects with its terms and with the requirements prescribed by any and allApplicable Law that is applicable to such Seller Benefit Arrangement.

 

(iii)                               Sellerhas delivered to Buyer and its legal counsel a complete and correct copy ofeach Seller Benefit Arrangement.

 

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#### (iv)                              Sellerhas timely filed and delivered or made available to Buyer and its legal counselall material written communications within the last year with participants, theInternal Revenue Service, the U.S. Department of Labor or any otherGovernmental Authority, administrators, trustees, beneficiaries and alternatepayees relating to any Seller Benefit Arrangement.

####  

#### (v)                                 Nosuit, administrative proceeding, action or other litigation has been brought,or to the knowledge of Seller, is threatened in writing against or with respectto any Seller Benefit Arrangement, including any audit or inquiry by theInternal Revenue Service or the U.S. Department of Labor.

####  

#### (vi)                              Allmaterial contributions due from Seller or its Subsidiaries with respect to anyof the Seller Benefit Arrangements have been made or have been accrued onSeller’s financial statements (including the Seller Financial Statements), andno further contributions shall be due or shall have accrued thereunder as ofthe Closing Date (other than contributions accrued in the ordinary course ofbusiness, consistent with past practices, after the Balance Sheet Date as aresult of the operations of Seller after the Balance Sheet Date).

####  

### (e)                                  EachSeller Benefit Arrangement, to the extent applicable, is in compliance, in allmaterial respects, with the continuation coverage requirements ofSection 4980B of the Code, Sections 601 through 608 of ERISA, asapplicable, the Americans with Disabilities Act of 1990, as amended, and theregulations thereunder, the Health Insurance Portability and Accountability Actof 1996, as amended, the Women’s Health and Cancer Rights Act of 1998, and theFamily Medical Leave Act of 1993, as amended, and the regulations thereunder,as such requirements affect Seller and its employees.

###  

### (f)                                    Exceptas set forth Schedule 4.16(f) of the Seller Disclosure Letter, nobenefit payable or that may become payable by the Seller pursuant to any SellerBenefit Arrangement or as a result of, in connection with or arising under thisAgreement shall constitute a ”parachute payment” (as defined inSection 280G(b)(2) of the Code) that is subject to the imposition of anexcise tax under Section 4999 of the Code or that would not be deductibleby reason of Section 280G of the Code. Unless otherwise indicated in Schedule 4.16(f) of the SellerDisclosure Letter (and except for any acceleration or change contemplated bythis Agreement), Seller is not a party to any: (i) Contract with any “disqualified individual” (as defined inSection 280G(c) of the Code) (A) the benefits of which arecontingent, or the terms of which are materially altered, upon the occurrenceof a transaction involving Seller in the nature of the Asset Purchase or any ofthe other transactions contemplated by this Agreement or any Seller AncillaryAgreement, (B) providing any term of employment or compensation guarantee,or (C) providing severance benefits or other benefits after thetermination of employment of such employee regardless of the reason for suchtermination of employment; or (ii) Contract or plan, including any stockoption plan, stock appreciation rights plan or stock purchase plan, any of thebenefits of which shall be increased, or the vesting of benefits of which shallbe accelerated, by the occurrence of the Asset Purchase or any of the othertransactions contemplated by this Agreement, or any event subsequent to theAsset Purchase such as the termination of employment of any person, or thevalue of any of the benefits of which shall be calculated on the basis of anyof the transactions contemplated by this Agreement.

 

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### (g)                                 Eachcompensation and benefit plan that has been established or maintained, or thatis required to be maintained or contributed to by the law or applicable customor rule of the relevant jurisdiction, outside of the United States by Seller orany of its Subsidiaries (each such plan, a “**Foreign Plan**”)is listed in Schedule 4.16(g)-1 of the Seller DisclosureLetter.  Except as set forth in Schedule 4.16(g)-2of the Seller Disclosure Letter, as regards each Foreign Plan, (i) suchForeign Plan is in compliance in all material respects with the provisions ofthe laws of each jurisdiction in which such Foreign Plan is maintained, to theextent those laws are applicable to such Foreign Plan, (ii) allcontributions to, and material payments from, such Foreign Plan that may havebeen required to be made in accordance with the terms of such Foreign Plan,and, when applicable, the law of the jurisdiction in which such Foreign Plan ismaintained, have been timely made or shall be made by the Closing Date, and allsuch contributions to such Foreign Plan, and all payments under such ForeignPlan, for any period ending before the Closing Date that are not yet, but will be,required to be made, are included as an accrued liability on the Seller BalanceSheet, (iii) Seller and each ERISA Affiliate has materially complied withall applicable reporting and notice requirements, and such Foreign Plan hasobtained from the Governmental Entity having jurisdiction with respect to suchForeign Plan any required determinations, if any, that such Foreign Plan is incompliance with the laws of the relevant jurisdiction if such determinationsare required in order to give effect to such Foreign Plan, (iv) suchForeign Plan has been administered in all material respects at all times inaccordance with its terms and applicable law and regulations, (v) to theknowledge of Seller, there are no pending investigations by any governmentalbody involving such Foreign Plan, and no pending claims (except for claims forbenefits payable in the normal operation of such Foreign Plan), suits orproceedings against such Foreign Plan or asserting any rights or claims tobenefits under such Foreign Plan, (vi) the consummation of thetransactions contemplated by this Agreement will not by itself create orotherwise result in any liability with respect to such Foreign Plan other thanthe triggering of payment to participants, and (vii) except as required byapplicable laws, no condition exists that would prevent Seller from terminatingor amending any Foreign Plan at any time for any reason in accordance with theterms of each such Foreign Plan (other than normal and reasonable expensestypically incurred in a termination event).

###  

## 4.17                           CorporateDocuments.  Seller has delivered ormade available to Buyer’s legal counsel for examination:  (a) copies of the Certificate ofIncorporation and Bylaws or Memorandum of Association or Articles ofAssociation, as applicable, each as currently in effect, of each of the TelosSellers; and (b) the minute books containing all records of allproceedings, consents, actions and meetings of the Board of Directors and anycommittees thereof and stockholders of each of the Telos Sellers.  Schedule 4.17 of the SellerDisclosure Letter sets forth a true, correct and complete list of the names andaddresses of each Person who, as of the date hereof, may reasonably be deemedto be an Affiliate of Seller.

##  

## 4.18                           NoBrokers.  Except for fees payable toDresdner Kleinwort Wasserstein, Inc. solely by Seller, as set forth in theengagement letter between Seller and Dresdner Kleinwort Wasserstein, Inc.,dated November 7, 2003, neither Seller nor any affiliate of Seller isobligated for the payment of any fees or expenses of any investment banker,broker, finder or similar party in connection with the origin, negotiation orexecution of this Agreement or in connection with the Asset Purchase or anyother transaction contemplated by this Agreement.

 

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## 4.19                           Booksand Records.  The books, records andaccounts of Seller (i) are in all material respects true and correct,(ii) are stated in reasonable detail and accurately and fairly reflect thetransactions and dispositions of the assets and properties of Seller, and(iii) accurately and fairly reflect the basis for the Seller FinancialStatements and 2003 Audited Financial Statements.

##  

## 4.20                           Insurance.  Seller maintains the policies of insuranceand bonds set forth in Schedule 4.20 of the Seller DisclosureLetter, including all legally required workers’ compensation insurance anderrors and omissions, casualty, fire and general liability insurance.  There is no material claim pending under anyof such policies or bonds as to which coverage has been questioned, denied ordisputed by the underwriters of such policies or bonds.  Seller has delivered to Buyer correct andcomplete copies of all such policies of insurance and bonds issued at therequest or for the benefit of Seller or its Subsidiaries.

##  

## 4.21                           EnvironmentalMatters.

##  

### (a)                                  (1)  EachTelos Seller, (ii) to the knowledge of Seller, the real property leased bySeller and its Subsidiaries as set forth in Schedule 4.9 of theSeller Disclosure Letter (the “**Leased Property**”),and (iii) all operations on the real property leased by Seller and itsSubsidiaries are in compliance, in all material respects, with allEnvironmental Laws (as defined below), which compliance includes the possessionby Seller of all permits and other governmental authorizations required underEnvironmental Laws (the “**Environmental Permits**”)and compliance with the terms and conditions thereof.  Each Environmental Permit is valid, subsisting and in goodstanding and no proceeding is pending or threatened and no grounds exist torevoke or limit any Environmental Permit. Seller has not received any written notice, whether from a GovernmentalAuthority, citizens groups, employee or otherwise, that alleges that Seller orany of its Subsidiaries is not in compliance with any Environmental Law.  To the knowledge of Seller, no current orprior owner of any property leased or possessed by Seller or any of itsSubsidiaries has received any notice, whether from a Governmental Authority,citizens group, employee or otherwise, that alleges that such current or priorowner or Seller is not in compliance with any Environmental Law.  All Environmental Permits held by Seller areidentified in Schedule 4.21 of the Seller Disclosure Letter.  To the knowledge of Seller, no building,structure or improvement located on the Leased Property is insulated with ureaformaldehyde insulation, and none of such buildings or structures containasbestos or polychlorinated biphenyls (PBCs). To the knowledge of Seller, no underground storage tanks are or havebeen located on the Leased Property. None of the Telos Sellers have caused any spill, discharge, or releaseof any Materials of Environmental Concern on, in or in the vicinity of theLeased Property.  The Telos Sellers havedelivered to Buyer all environmental audits, evaluations, assessments, studiesor tests relating to the Business, the Purchased Assets or the Leased Propertywhich are within the possession or control of the Telos Sellers.

###  

### (b)                                 Forpurposes of this Section 4.21:  (i)“**Environmental Law**” means any federal,state, provincial or local statute, law, regulation or other legal requirementrelating to pollution or protection of human health or the environment(including ambient air, surface water, ground water, land surface or subsurfacestrata), including any law or regulation relating to emissions, discharges,releases or threatened releases of Materials of Environmental Concern orotherwise relating to the manufacture, processing, distribution, use, treatment,storage, disposal,

 

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### transport or handling of Materials ofEnvironmental Concern or relating to the regulation of contaminated sites; and(ii) “**Materials of EnvironmentalConcern**” include chemicals, pollutants, contaminants, wastes, toxicsubstances, petroleum and petroleum products and any other substance that iscurrently regulated by an Environmental Law or that is otherwise a danger tohealth, reproduction or the environment.

###  

## 4.22                           BoardActions.  Seller’s Board ofDirectors (a) has determined that the Asset Purchase is advisable and inthe best interests of the Seller Stockholders and is on terms that are fair tothe Seller Stockholders, and has determined to recommend the Asset Purchase tothe Seller Stockholders, (b) resolved to recommend this Agreement and theAsset Purchase to its Shareholders and holders of Seller Convertible Notes forapproval and adoption and (c) shall submit the Asset Purchase, thisAgreement, each of the Seller Ancillary Agreements and all other agreements,transactions and actions contemplated hereby and thereby, to the extent thatthe approval of the Seller Stockholders and holders of Seller Convertible Notesis required thereof under Applicable Law or the Seller’s Certificate ofIncorporation or Bylaws, each as currently in effect, to the vote and approvalof the Seller Stockholders and holders of Seller Convertible Notes.

##  

## 4.23                           Customersand Suppliers.

##  

### (a)                                  NeitherSeller nor any of its Subsidiaries has any outstanding dispute concerning itsgoods and/or services with any customer who, in the year endedDecember 31, 2003 was one of the 10 largest sources of revenue forSeller, based on amounts paid or payable (each, a “**SignificantCustomer**”).  Each SignificantCustomer is listed on Schedule 4.23(a) of the Seller DisclosureLetter.  Neither Seller nor any of itsSubsidiaries has received any notice from any Significant Customer that anySignificant Customer will not continue as a customer of the Business after theClosing or that any such customer intends to terminate or materially modifyexisting contracts with Seller or substantially reduce its purchase or use ofSeller Products or Services.  Seller hasnot had any of its products returned by a purchaser thereof except for normalwarranty returns consistent with past practice.

###  

### (b)                                 NeitherSeller nor any of its Subsidiaries has any outstanding dispute concerning goodsand/or services provided by any supplier who, in the year endedDecember 31, 2003 was one of the 10 largest suppliers of goods and/orservices to Seller, based on amounts paid or payable (each, a “**Significant Supplier**”). Each Significant Supplier is listed on Schedule 4.23(b) ofthe Seller Disclosure Letter.  NeitherSeller nor any of its Subsidiaries has received any notice of termination orinterruption of any existing contracts with any Significant Supplier.

###  

## 4.24                           ProductWarranty.  Except as set forth in Schedule 4.24 of the SellerDisclosure Letter, the Telos Sellers have no liability for replacement ormodification of the Seller Products or Services licensed, sold, leased, anddelivered in connection with the Business (other than pursuant to customeragreements entered into in the ordinary course of business).

##  

## 4.25                           Solvency.  Each Telos Seller will be Solvent as ofimmediately following the consummation of the transactions contemplated by thisAgreement (assuming receipt by such Telos Seller of such Telos Seller’s portionof the Purchase Price due and payable to such Telos

 

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## Seller upon the Closing by Buyer and theassumption of the Assumed Liabilities by Buyer).  “Solvent” means (a) the fair value of the property of such TelosSeller is greater than the total amount of liabilities, including contingentliabilities, of such Telos Seller that are known to the Board of Directors ofSeller as of the date hereof (such contingent liabilities being computed as theamount that, in light of all the facts and circumstances existing at the time,represents the amount that can be reasonably be expected to become an actual ormatured liability); (b) the present fair saleable value of the assets of suchTelos Seller is not less than the amount that will be required to pay theprobable liability of such Telos Seller on such Telos Seller’s debts that areknown to the Board of Directors of Seller as of the date hereof as they becomeabsolute and matured; and (c) such Telos Seller does not intend to, and doesnot believe that it will, incur debts or liabilities beyond such Telos Seller’sability to pay as such debts and liabilities mature.

##  

## 4.26                           RepresentationsComplete.  None of therepresentations or warranties made by Seller (as modified by the SellerDisclosure Letter), nor any statement made in any schedule or certificatefurnished by Seller pursuant to this Agreement, taken as a whole, contains orwill contain at the Closing Date, any untrue statement of a material fact, oromits or will omit at the Closing Date to state any material fact necessary inorder to make the statements contained herein or therein, in the light of thecircumstances under which made, not misleading.

##  

# ARTICLE 5REPRESENTATIONS AND WARRANTIES OF BUYER

#  

Subject to the exceptionsset forth in the disclosure letter of the Buyer addressed to Seller, dated asof the Agreement Date and delivered to Seller concurrently with the parties’execution of this Agreement (the “**BuyerDisclosure Letter**” (if any)), Buyer represents and warrants toSeller as follows:

 

## 5.1                                 Organizationand Good Standing.  Buyer is acorporation duly organized, validly existing and in good standing under thelaws of the State of Delaware and has the corporate power and authority to own,operate and lease its properties and to carry on its business as now conductedand as presently proposed to be conducted. Buyer is duly qualified or licensed to do business, and is in goodstanding, in each jurisdiction where the character of the properties owned,leased or operated by it or the nature of its activities makes suchqualification or licensing necessary, except where the failure to be soqualified or licensed would not individually or in the aggregate have aMaterial Adverse Effect on the Buyer.

##  

## 5.2                                 Power,Authorization and Validity.

##  

### (a)                                  Powerand Authority.  Buyer has allrequisite corporate power and authority to enter into, execute, deliver andperform its obligations under this Agreement and each of the Buyer AncillaryAgreements and to consummate the Asset Purchase.  The execution, delivery and performance by Buyer of this Agreement,each of the Buyer Ancillary Agreements and all other agreements, transactionsand actions contemplated hereby or thereby have been duly and validly approvedand authorized by all necessary corporate action on the part of Buyer.  The Board of Directors of Buyer has approvedthis Agreement and the Asset Purchase and determined that this Agreement andthe Asset Purchase are fair and in the best interests of the stockholders ofBuyer.

 

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### (b)                                 NoConsents.  No consent, approval,order or authorization of, or registration, declaration or filing with, anyGovernmental Authority, or any other Person, governmental or otherwise, isnecessary or required to be made or obtained by Buyer to enable Buyer tolawfully execute and deliver, enter into, and perform its obligations underthis Agreement, each of the Buyer Ancillary Agreements or to consummate theAsset Purchase (as applicable).

###  

### (c)                                  Enforceability.  This Agreement has been duly executed anddelivered by Buyer.  This Agreement andeach of the Buyer Ancillary Agreements are, or when executed by Buyer shall be,valid and binding obligations of Buyer, enforceable against Buyer in accordancewith their respective terms, subject to the effect of (i) applicablebankruptcy, insolvency, reorganization, moratorium or other similar laws now orhereafter in effect relating to rights of creditors generally and(ii) rules of law and equity governing specific performance, injunctiverelief and other equitable remedies.  Noconsent, vote or approval of the stockholders of Buyer is necessary or requiredto be obtained by Buyer to enable Buyer to lawfully execute and deliver, enterinto, and perform its obligations under this Agreement and each of the BuyerAncillary Agreements, or to consummate the Asset Purchase.

###  

## 5.3                                 SufficientFunds.  Buyer has, and will haveavailable to it upon the consummation of the Asset Purchase, without any needfor outside financing, sufficient funds to consummate the transactionscontemplated hereby, including payment in full of the Initial Payment and theEarnout.

##  

## 5.4                                 NoConflict.  Neither the execution anddelivery of this Agreement or any of the Buyer Ancillary Agreements nor theconsummation of the Asset Purchase or any other transaction contemplated herebyor thereby, shall conflict with, or (with or without notice or lapse of time,or both) result in a termination, breach, impairment or violation of, orconstitute a default under, or require any consent under, or give to others anyrights of termination, amendment or acceleration under:  (a) any provision of the Certificate ofIncorporation or Bylaws of Buyer, each as currently in effect; (b) in anymaterial respect, any Applicable Law applicable to Buyer or any of its materialassets or properties; or (c) any Contract to which Buyer is a party or bywhich Buyer or any of its material assets or properties are bound, except inthe case of clause (c) where such conflict, termination, breach,impairment, violation, default, failure to obtain consent, or rights oftermination, amendment or acceleration, would not have a Material AdverseEffect on Buyer.

##  

## 5.5                                 NoBrokers.  Except for fees payable toThomas Weisel Partners solely by Buyer, neither Buyer nor any affiliate ofBuyer is obligated for the payment of any fees or expenses of any investmentbanker, broker, finder or similar party in connection with the origin,negotiation or execution of this Agreement or in connection with the AssetPurchase or any other transaction contemplated by this Agreement.

 

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# ARTICLE 6SELLER COVENANTS

#  

During the time periodfrom the Agreement Date until the earlier to occur of (a) the Closing or(b) the termination of this Agreement in accordance with the provisions ofArticle 10, Seller covenants and agrees with Buyer as follows:

 

## 6.1                                 Adviceof Changes.  Seller shall promptlyadvise Buyer in writing of (a) any event occurring subsequent to theAgreement Date that would render any representation or warranty of Sellercontained in Article 4 untrue or inaccurate such that the condition setforth in Section 9.1 would not be satisfied, (b) any breach of anycovenant or obligation of Seller pursuant to this Agreement or any SellerAncillary Agreement such that the condition set forth in Section 9.2 wouldnot be satisfied or (c) any Material Adverse Change in Seller.

##  

## 6.2                                 Maintenanceof Business.  Seller shall usecommercially reasonable efforts to carry on and preserve the Business and itsrelationships with customers, advertisers, suppliers, employees and others withwhom Seller has contractual or business relations in substantially the samemanner as it has prior to the Agreement Date consistent with its pastpractices.  If Seller becomes aware of amaterial deterioration in the relationship with any key customer, keyadvertiser, key supplier or key employee, it shall promptly bring suchinformation to Buyer’s attention in writing and, if requested by Buyer, shallexert reasonable commercial efforts to promptly restore the relationship.  At Buyer’s request such cooperation mayinclude joint customer calls and cooperation in setting sales, marketing andmanufacturing strategies.

##  

## 6.3                                 Conductof Business.  Seller shall continueto conduct Business and maintain its business relationships in the ordinary andusual course consistent with its past practices and, except as set forth in Schedule 6.3of the Seller Disclosure Letter, Seller shall not, without Buyer’s priorwritten consent, which consent shall not be unreasonably withheld or delayed:

##  

### (a)                                  Exceptfor any Additional Indebtedness, incur any indebtedness for borrowed money orguarantee any such indebtedness of another Person or issue or sell any debtsecurities or guarantee any debt securities of another Person;

###  

### (b)                                 (i) lendany money, other than reasonable and normal advances to employees for bona fideexpenses that are incurred in the ordinary course of business consistent withits past practices, (ii) make any investments in or capital contributionsto, any Person, (iii) forgive or discharge in whole or in part anyoutstanding loans or advances, or (iv) prepay any indebtedness;

###  

### (c)                                  enterinto any Seller Material Contract (or any agreement which would be a SellerMaterial Contract if in effect on the date hereof), violate, terminate, amendor otherwise modify or waive any of the material terms of any Seller MaterialContract, or enter into any material transaction or take any other action notin the ordinary course of business consistent with its past practices;

###  

### (d)                                 placeor allow the creation of any Encumbrance (other than a Permitted Encumbrance)on any of the Purchased Assets;

 

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### (e)                                  enterinto any Contract involving in excess of $50,000 for the purchase, sale orlease of any assets or property (whether real or personal, tangible orintangible), except in the ordinary course of business;

###  

### (f)                                    exceptas required herein, (i) pay or grant any bonus, increased salary,severance, termination or special remuneration to any officer, director,employee or consultant (except pursuant to the Management IncentivePlan—M&A or any Contracts disclosed in writing to Buyer prior to theAgreement Date and listed on Schedule 6.3 of the Seller DisclosureLetter), (ii) amend or enter into any employment or consulting Contractwith any such person, or (iii) adopt, amend, establish or enter into anyemployee or compensation benefit plan, trust, fund, policy or arrangement,including any stock purchase, stock issuance or stock option plan, collectivebargaining, bonus, profit sharing, thrift, pension, retirement, deferredcompensation, termination or severance plan or amend any compensation, benefit,entitlement, grant or award provided or made under any such plan (except ineach case as required under ERISA or similar foreign laws, or as necessary tomaintain the qualified status of such plan under the Code);

###  

### (g)                                 changeany of its accounting methods except as required by Applicable Law;

###  

### (h)                                 declare,set aside or pay any cash or stock dividend or other distribution (whether incash, stock or property) in respect of its capital stock, or redeem, repurchaseor otherwise acquire any of its capital stock or other securities (except forthe repurchase of stock from its employees, directors, consultants or contractorsin connection with the termination of their services at the original purchaseprice of such stock), or pay or distribute any cash or property to any of itsstockholders or securityholders or make any other cash payment to any of itsstockholders or securityholders;

###  

### (i)                                     exceptfor any Additional Indebtedness, issue, sell, create or authorize any shares ofits capital stock of any class or series or any other of its securities, orissue, grant or create any warrants, obligations, subscriptions, options,convertible securities, or other commitments to issue shares of its capitalstock or any securities that are potentially exchangeable for, or convertibleinto, shares of its capital stock, other than the issuance of shares of SellerCommon Stock pursuant to the exercise of Seller Options outstanding on theAgreement Date and the issuance of shares of Seller Preferred Stock pursuant tothe exercise of Seller Warrants outstanding on the Agreement Date, theconversion of Seller Senior Convertible Notes or upon conversion of the SellerPreferred Stock;

###  

### (j)                                     amendSeller’s Certificate of Incorporation or Bylaws or the equivalent charterdocuments of the other Telos Sellers;

###  

### (k)                                  sellor license any of its technology, software or Intellectual Property (includingwithout limitation to customers or potential customers) other than licenses inthe ordinary course of business, or acquire any technology, software orIntellectual Property (or any license thereto) from any third party (other thanlicenses of software generally available to the public) other than in theordinary course of business or enter into any agreements relating to thedevelopment of technology, software or Intellectual Property;

 

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### (l)                                     (i) initiateany litigation, action, suit, proceeding, claim or arbitration (other than forthe routine collection of bills) or (ii) except for those matters setforth on Schedule 6.3, settle or agree to settle any litigation,action, suit, proceeding, claim or arbitration (except where the amount incontroversy does not exceed $50,000 and does not involve injunctive or otherequitable relief);

###  

### (m)                               (i) exceptfor those matters set forth on Schedule 6.3 of the SellerDisclosure Letter, pay, discharge or satisfy, in an amount in excess of $50,000in any one case or $250,000 in the aggregate, any Liability arising otherwisethan in the ordinary course of business, other than the payment, discharge orsatisfaction of Liabilities reflected or reserved against in the Seller BalanceSheet, or (ii) make any capital expenditures, capital additions or capitalimprovements except in the ordinary course of business consistent with its pastpractices;

###  

### (n)                                 amendor modify any product or service warranties in effect as of the date hereof inany material manner that is adverse to the Telos Sellers.

###  

### (o)                                 enterinto any exclusive license, distribution, marketing or sales agreement;

###  

### (p)                                 enterinto any commitment to any person to (i) develop software without chargeor (ii) incorporate any material software of such person into any of theproducts of the Telos Sellers;

###  

### (q)                                 permitany Seller-Owned IP Rights to lapse or to be abandoned, dedicated, ordisclaimed, fail to perform or make any applicable filings, recordings or othersimilar actions or filings, or fail to pay all required fees and Taxes requiredor advisable to maintain and protect its interest in all Seller-Owned IPRights;

###  

### (r)                                    (i) agreeto do any of the things described in the preceding clauses (a)-(q),(ii) take or agree to take any action which would make any of Seller’srepresentations or warranties contained in this Agreement materially untrue orincorrect, or (iii) take or agree to take any action which would preventSeller from performing or cause Seller not to perform one or more covenantsrequired hereunder to be performed by Seller.

###  

## 6.4                                 RegulatoryApprovals.  Seller shall promptlyexecute and file, or join in the execution and filing of, any application,notification or other document that may be necessary in order to obtain theauthorization, approval or consent of any Governmental Authority, whetherfederal, state, local or foreign, which may be reasonably required, or whichBuyer may reasonably request, in connection with the consummation of the AssetPurchase and the other transactions contemplated by this Agreement or anySeller Ancillary Agreement.  Sellershall use diligent efforts to obtain, and to cooperate with Buyer to promptlyobtain, all such authorizations, approvals and consents and shall pay anyassociated filing fees payable by Seller with respect to such authorizations,approvals and consents.  Seller shallpromptly inform Buyer of any material communication between Seller and anyGovernmental Authority regarding any of the transactions contemplated hereby.  If Seller or any affiliate of Sellerreceives any formal or informal request for supplemental information ordocumentary material from any Governmental Authority with respect to thetransactions contemplated hereby, then Seller shall make, or cause

 

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## to be made, as soon as reasonablypracticable, a response in compliance with such request.  The parties waive compliance by the otherparties hereto with any applicable California bulk sales law.

 

## 6.5                                 NecessaryConsents.  Seller shall usecommercially reasonable efforts to promptly obtain such material writtenconsents and authorizations of third parties, give notices to third parties andtake such other actions as may be necessary or appropriate in order to effectthe consummation of the Asset Purchase and the other transactions contemplatedby this Agreement, to enable Buyer to carry on the Business immediately afterthe Closing in all material respects and to keep in effect and avoid thebreach, violation of, termination of, or adverse change to any Seller MaterialContract to which Seller is a party or is bound or by which any of its assetsor properties is bound, all as identified on Schedule 6.5 of theSeller Disclosure Letter hereto.

##  

## 6.6                                 Litigation.  Seller shall notify Buyer in writingpromptly after learning of any claim, action, suit, arbitration, mediation,proceeding or investigation by or before any court, arbitrator or arbitrationpanel, board or governmental agency, initiated by or against it, or known bySeller to be threatened against Seller or any of its Subsidiaries, officers,directors, employees or stockholders in their capacity as such.

##  

## 6.7                                 NoSolicitation; Acquisition Proposals.

##  

### (a)                                  NoSolicitation Generally.  From andafter the date of this Agreement until the Closing or termination of thisAgreement pursuant to Article 10, Telos Sellers will not, nor will theyauthorize or permit any of their respective officers, directors, affiliates oremployees or any investment banker, attorney or other advisor or representativeretained by any of them (all of the foregoing collectively being the “**Seller Representatives**”) to, directly or indirectly,(i) solicit, initiate, seek, entertain, encourage, facilitate, support orinduce the making, submission or announcement of any inquiry, expression ofinterest, proposal or offer that constitutes, or could reasonably be expectedto lead to, an Acquisition Proposal (as hereinafter defined), (ii) enterinto, participate in, maintain or continue any communications (except solely toprovide written notice as to the existence of these provisions) or negotiationsregarding, or deliver or make available to any Person any non-publicinformation with respect to, or take any other action regarding, any inquiry,expression of interest, proposal or offer that constitutes, or could reasonablybe expected to lead to, an Acquisition Proposal, (iii) agree to, accept,approve, endorse or recommend any Acquisition Proposal, (iv) enter intoany letter of intent or any other Contract contemplating or otherwise relatingto any Acquisition Proposal, (v) submit any Acquisition Proposal to thevote of any security holders of Seller or any Subsidiary, (vi) withhold,withdraw or modify, in a manner adverse to Buyer, the approval of Seller Boardof this Agreement and/or any of the transactions contemplated hereby, or(vii) take any action or position that is inconsistent with, or withdrawor modify, in a manner adverse to Buyer, any determination or recommendationreferred to in Section 6.11(b).  Ifany Seller Representative, whether in his or her capacity as such or in anyother capacity, takes any action that Seller is obligated pursuant to thisSection 6.7 to cause such Seller Representative not to take, then Sellershall be deemed for all purposes of this Agreement to have breached thisSection 6.7.

###  

“**Acquisition Proposal**” shall mean, withrespect to Seller, any agreement, offer, proposal or indication of interest(other than this Agreement, the Asset Purchase or any other

 

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offer, proposal orindication of interest by Buyer), or any public announcement of intention toenter into any such agreement or of any offer, proposal or indication ofinterest, relating to, or involving: (A) any sale, exchange, transfer,purchase or other acquisition or disposition of more than a 20% interest in thetotal outstanding voting securities of Seller or any Telos Seller or any tenderoffer or exchange offer that if consummated would result in any Person or groupbeneficially owning 20% or more of the total outstanding voting securities ofSeller or any Telos Seller or any merger, consolidation, business combinationor similar transaction involving Seller or any of its Subsidiaries;(B) any sale, lease (other than in the ordinary course of business),mortgage, pledge, exchange, transfer, license (other than in the ordinarycourse of business), acquisition, or disposition of substantially all of theassets of Telos Sellers in any single transaction or series of relatedtransactions; (C) any liquidation or dissolution of Seller or any of itsSubsidiaries; or (D) any other transaction the consummation of which wouldreasonably be expected to materially impede, interfere with, prevent ormaterially delay the Asset Purchase.

 

### (b)                                 Notice.  Seller shall promptly (and in any eventwithin two (2) calendar days) advise, orally and in writing, Buyer of(i) an Acquisition Proposal, (ii) any inquiry, expression ofinterest, proposal, or offer that constitutes, or could reasonably be expectedto lead to, an Acquisition Proposal, or (iii) any request for non-publicinformation which could reasonably be expected to lead to an AcquisitionProposal as well as, in the event of any of (i)-(iii) above, (1) the materialterms and conditions of such Acquisition Proposal, inquiry, expression ofinterest, proposal, offer, notice or request, and (2) the identity of thePerson or group making any such Acquisition Proposal, inquiry, expression ofinterest, proposal, offer, notice or request. Seller will (x) keep Buyer informed as promptly as practicable ofthe status and details (including any amendments, modifications or proposedamendments or modifications) of any such Acquisition Proposal, inquiry,expression of interest, proposal, offer, notice or request and (y) provideto Buyer as promptly as practicable a copy of all written and other materialsand information provided to Seller in connection with any such AcquisitionProposal, inquiry, expression of interest, proposal, offer, notice orrequest.  Seller shall provide Buyerwith at least twenty-four hours’ prior notice of any meeting of the SellerBoard at which the Seller Board is reasonably expected to consider anyAcquisition Proposal to determine whether such Acquisition Proposal is asuperior offer.

###  

## 6.8                                 Accessto Information.  Seller, uponreasonable notice, shall allow Buyer and its agents and advisors access duringSeller’s business hours to the files, books, records, technology, Contracts,personnel and offices of Telos Sellers, including any and all informationrelating to Seller’s Taxes, Contracts, Liabilities, financial condition andreal, personal and intangible property, subject to the terms of theNondisclosure Letter Agreement between Seller and Buyer dated February 6,2004 (the “**Mutual NDA**”) and provided thatsuch access shall not unduly disrupt Seller’s normal business activities.  Seller shall use its commercially reasonableefforts to cause its accountants to cooperate with Buyer and Buyer’s agents andadvisors (provided that, prior to any disclosure to such agents or advisors,such agents or advisors are bound by the terms of a confidentiality agreementwith substantially similar restrictions as included in the Mutual NDA torestrict the use and disclosure of Seller’s confidential information) in makingavailable all financial information reasonably requested by Buyer and itsagents and advisors, including the right to examine all working paperspertaining to all financial statements prepared or audited by such accountants.

 

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## 6.9                                 Satisfactionof Conditions Precedent.  Sellershall use its reasonable best efforts to satisfy or cause to be satisfied allthe conditions precedent set forth in Article 9, and Seller shall use itsreasonable best efforts to cause the Asset Purchase and the other transactionscontemplated by this Agreement to be consummated in accordance with the termsof this Agreement.

##  

## 6.10                           SellerEmployees.  Within seven days of thedate hereof, Buyer shall deliver to Seller a list of the employees of theBusiness to which Buyer wishes to offer employment (which list shall include atleast 70% of the aggregate number of employees and consultants of the TelosSellers as of the date hereof, and Buyer (or a Subsidiary thereof) shall offeremployment, subject to completion of the Closing and effective on the ClosingDate, on terms substantially equivalent to (or better than) those in effectprior to Closing (other than with respect to location of employment foremployees employed outside of Canada), to each such employee (each, an “**Employee Offeree**”). In addition to any Assumed Liabilities assumed by Buyer with respect toTransferred Employees, Buyer shall also assume and pay as an Assumed Liabilityall costs associated with the termination by Seller of the employment of thatnumber of Telos Seller employees that is equal to the number by which thenumber of Employee Offerees is less than 70% of the aggregate number ofemployees and consultants of the Telos Sellers as of the date hereof, in whichevent the obligations of Buyer to cover such termination costs under thisSection 6.10 on the one hand and the obligations of the Telos Sellers to paytermination costs with respect to employees under Section 2.1(d) on the otherhand shall be allocated, as to which party has responsibility for thetermination costs payable with respect to each such individual terminatedemployee, on an equitable basis to be agreed in good faith by the parties.  The Telos Sellers shall terminate, subjectto completion of the Closing and effective on the Closing Date, the employmentof any Employee Offeree who does not accept such offer prior to the ClosingDate.  Buyer (or a Subsidiary thereof)shall on or prior to the Closing again offer employment to each such EmployeeOfferee who did not accept such offer, provided that such Employee Offeree islisted on a certificate of Seller delivered to Buyer no more than 3 days priorto the Closing, effective immediately, on terms substantially equivalent to (orbetter than) those in effect prior to the Closing.  Prior to or promptly after termination or resignation of eachEmployee Offeree who accepts any such offer of employment (each, a “**Transferring Employee**”), the Telos Seller that employed suchTransferring Employee shall pay to such Transferring Employee all accrued andunpaid salary and other compensation (including accrued and unpaid vacation paybut excluding any severance or termination payments) to which such TransferringEmployee may be entitled under Applicable Law or Contract (other than accruedand unpaid salary payable to Jack Mar and Ron McLeod which shall be an AssumedLiability to be discharged by Buyer upon the Closing). The Telos Sellers shalluse their best efforts to assist, and shall cooperate with and not interferewith, Buyer (and the applicable Subsidiaries thereof) in connection with therecruitment and hiring of employees of the Business, pursuant to thisSection 6.10 or otherwise.

##  

## 6.11                           Approvalof the Seller Stockholders.  EachTelos Seller has taken all action necessary in accordance with, as applicable,this Agreement, the Seller Convertible Notes, Applicable Law, and theorganizational documents of such Telos Seller to obtain the written consent ofthe Seller, TELOS Hong Kong and the Seller Stockholders and holders of theSeller Convertible Notes approving the Asset Purchase and adopting thisAgreement (the written consent of the Seller Stockholders and the holders ofthe Seller Convertible Notes being,

 

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## the “**Seller Stockholders Consent**”) as of the date hereof.  Within ten business days after the date ofthis Agreement, the Seller shall distribute to its stockholders, after priorapproval by Buyer, which approval shall not be unreasonably withheld ordelayed, an information statement (together with any amendments thereof orsupplements thereto, the “**Information Statement**”)to provide notice to such stockholders of the action taken by written consentin lieu of a meeting to approve this Agreement and the transaction contemplatedhereby, as required by Section 228(e) of the Delaware General CorporationLaw.  The Seller represents and warrantsto Buyer that the Information Statement will not, at the time it is firstmailed to the Seller’s stockholders, contain any untrue statement of a materialfact or omit to state any material fact required to be stated therein ornecessary in order to make the statements therein, in light of thecircumstances under which they were made, not misleading; provided, however,that the Seller makes no representation or warranty with respect to anyinformation contained in the Information Statement furnished to the Seller byBuyer or any of its affiliates.  Noamendment or supplement to the Information Statement will be made by the Sellerwithout the approval of Buyer, which shall not be unreasonably withheld ordelayed.

##  

## 6.12                           Noticesto Seller Securityholders and Employees.

##  

### (a)                                  Sellershall timely provide to holders of Seller Capital Stock and Seller Options alladvance notices required to be given to such holders in connection with thisAgreement, the Asset Purchase and the transactions contemplated by thisAgreement under the Seller Option Plan or other applicable Contracts.

###  

### (b)                                 Sellershall give all notices and other information required to be given to theemployees of Seller and any applicable Governmental Authority under the Code,the Worker Adjustment and Retraining Notification Act of 1988, if applicableand other Applicable Law in connection with the transactions contemplated bythis Agreement or other applicable Contracts.

###  

## 6.13                           AuditedFinancial Statements.  As soon aspracticable, Seller agrees to furnish or cause to be furnished to Buyer theaudited balance sheet of Seller as of December 31, 2003, and therelated audited statements of operations, statements of cash flows andstatements of changes in stockholders’ equity for the year endedDecember 31, 2003, and any notes to the foregoing financialstatements (the “**2003 Audited Financial Statements**”).

##  

## 6.14                           ClosingBalance Sheet.  By the later of May31st, 2004 and two weeks from Closing, Seller shall deliver to Buyerthe Closing Balance Sheet.  Inconnection with the preparation of the Closing Balance Sheet Buyer shallprovide Seller and Seller’s independent auditors and authorized representativesfull access at all reasonable times to the properties, books, records andpersonnel of the Business in their possession, custody or control relating toperiods prior to the Closing Date for purposes of preparing the Closing BalanceSheet.  Buyer shall pay all reasonablecosts and expenses of Seller’s independent auditors incurred in connection withthe preparation and review of the Closing Balance Sheet.  Buyer shall pay the reasonable costs and expensesincurred by Seller to retain Mr. Tim Law, or a similarly qualified person, fora period of no more than 30 days following the Closing to prepare the ClosingBalance Sheet.

 

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# ARTICLE 7BUYER COVENANTS

#  

During the time periodfrom the Agreement Date until the earlier to occur of (a) the Closing or(b) the termination of this Agreement in accordance with the provisions ofArticle 10, Buyer covenants and agrees with Seller as follows:

 

## 7.1                                 Adviceof Changes.  Buyer shall promptlyadvise Seller in writing of (a) any event occurring subsequent to theAgreement Date that would render any representation or warranty of Buyercontained in Article 5 untrue or inaccurate such that the condition setforth in Section 8.1 would not be satisfied or (b) any breach of anycovenant or obligation of Buyer pursuant to this Agreement or any BuyerAncillary Agreement such that the condition set forth in Section 8.2 wouldnot be satisfied.

##  

## 7.2                                 RegulatoryApprovals.  Buyer shall promptlyexecute and file, or join in the execution and filing of, any application,notification or other document that may be necessary in order to obtain theauthorization, approval or consent of any Governmental Authority, whetherforeign, federal, state, local or municipal, which may be reasonably requiredin connection with the consummation of the Asset Purchase and the othertransactions contemplated by this Agreement, any Buyer AncillaryAgreement.  Buyer shall use diligentefforts to obtain all such authorizations, approvals and consents and shall payany associated filing fees payable by Buyer with respect to suchauthorizations, approvals and consents. Buyer shall promptly inform Seller of any material communication betweenBuyer and any Governmental Authority regarding any of the transactionscontemplated hereby.  If Buyer or anyaffiliate of Buyer receives any formal or informal request for supplementalinformation or documentary material from any Governmental Authority withrespect to the transactions contemplated hereby, then Buyer shall make, orcause to be made, as soon as reasonably practicable, a response in compliancewith such request.

##  

## 7.3                                 Satisfactionof Conditions Precedent.  Buyershall use its reasonable best efforts to satisfy or cause to be satisfied allof the conditions precedent that are set forth in Article 9, and Buyershall use its reasonable best efforts to cause the Asset Purchase and the othertransactions contemplated by this Agreement to be consummated in accordance withthe terms of this Agreement.

##  

## 7.4                                 BuyerPlans.  As promptly as reasonablypracticable after the Closing, Buyer shall, or shall cause its Subsidiaries to,enroll all Transferring Employees in Buyer’s employee benefit plans (the “**Buyer Plans**”) subject to satisfaction of eligibilitystandards that are applicable to similarly situated employees of Buyer onsubstantially similar terms applicable to employees of Buyer who are similarlysituated based on levels of responsibility. Buyer shall recognize the prior service with Seller or its Subsidiaries,as applicable, of each of the Transferring Employees in connection with each ofthe Buyer Plans for purposes of eligibility and levels of benefits (other thanlevels of benefits under any “pension plan” within the meaning ofSection 3(2) of ERISA or any retiree welfare plan).  Notwithstanding anything in thisSection 7.4 to the contrary, this Section 7.4 shall not operate toduplicate any benefit provided to any Transferring Employee or to fund any suchbenefit.

 

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## 7.5                                 Directorsand Officers Insurance.  On or priorto the Closing Date, Seller shall procure, at its expense, a directors’ andofficers’ liability insurance policy in respect of acts or omissions occurringon or prior to the Closing Date covering persons who are currently covered bySeller’s directors’ and officers’ liability insurance policy in effect on thedate hereof.  Such policy shall be for aperiod of no more than six years from the Closing Date and shall includecoverage in the amount of $5,000,000 with the usual and customary scope ofcoverage.

##  

## 7.6                                 TransactionTaxes.  Buyer shall be responsiblefor any and all excise, value added, registration, stamp, property,documentary, transfer, sales, use and similar Taxes, levies, charges and fees(including all real estate transfer Taxes) incurred, or that may be payable toany taxing authority, in connection with, the transactions (including withoutlimitation the sale, transfer, and delivery of the Purchased Assets)contemplated by this Agreement provided that to the extent permitted byapplicable law, Buyer and Seller shall cooperate with each other to obtainexemptions from such Taxes or to otherwise legally minimize such Taxes.  Buyer shall timely file all Tax Returnsrelating to such Taxes that are required to be filed after the ClosingDate.  Notwithstanding the foregoing,each party shall be responsible for its own income, capital gain or othersimilar Taxes due in connection with the transactions (including withoutlimitation the sale, transfer, and delivery of the Purchased Assets)contemplated by this Agreement.

##  

## 7.7                                 Prorationof Property Taxes.  All PropertyTaxes levied with respect to the Purchased Assets for any Straddle Period,whether imposed or assessed in the Pre-Closing Tax Period or Post-Closing TaxPeriod, shall be prorated between the applicable Telos Seller and the Purchaseras of 12:01 A.M. on the date of the Closing. If any Taxes subject to proration are paid by Purchaser, on the onehand, or a Telos Seller, on the other hand, the proportionate amount of suchTaxes paid (or in the event a refund of any portion of such Taxes previouslypaid is received, such refund) shall be paid promptly by (or to) the otherafter the payment of such Taxes (or promptly following the receipt of any suchrefund).

##  

# ARTICLE 8CONDITIONS TO OBLIGATIONS OF TELOS SELLERS

#  

The obligations of theTelos Sellers to consummate the Asset Purchase and take the other actionsrequired to be taken by the Telos Sellers at the Closing are subject to thefulfillment or satisfaction as of the Closing, of each of the followingconditions (it being understood that (a) any one or more of the followingconditions may be waived by Seller in a writing signed on behalf of Seller and(b) by proceeding with the Closing, Seller shall be deemed to have waivedany of such conditions that remain unfulfilled or unsatisfied):

 

## 8.1                                 Accuracyof Representations and Warranties. The representations and warranties of Buyer set forth in Article 5shall be true and correct on and as of the Closing with the same force andeffect as if they had been made on the Closing Date (except for any suchrepresentations or warranties shall be true and correct, and suchrepresentations and warranties shall be true and correct on and as of suchspecified date or dates) except to the extent the failure of suchrepresentations and warranties to be so true and correct does not have aMaterial Adverse Effect on Buyer, and at the Closing Seller shall have receiveda certificate to such effect executed by an officer of Buyer.

 

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## 8.2                                 Covenants.  Buyer shall have performed and complied inall material respects with all of its covenants contained in Article 6 andArticle 7 on or before the Closing (to the extent that such covenantsrequire performance by Buyer on or before the Closing), and at the ClosingSeller shall have received a certificate to such effect executed by an officerof Buyer.

##  

## 8.3                                 Compliancewith Law; No Legal Restraints; No Litigation.  There shall not be issued, enacted or adopted any order, decree,temporary, preliminary or permanent injunction, legislative enactment, statute,regulation, action or proceeding, or any judgment or ruling by any GovernmentalAuthority that prohibits or renders illegal or imposes limitations on the AssetPurchase or any other material transaction contemplated by this Agreement.

##  

## 8.4                                 GovernmentConsents.  There shall have beenobtained at or prior to the Closing Date such permits or authorizations, andthere shall have been taken all such other actions by any GovernmentalAuthority or other regulatory authority having jurisdiction over the partiesand the actions herein proposed to be taken, as may be required to lawfully consummatethe Asset Purchase.

##  

## 8.5                                 SecretaryCertificates.  Seller shall havereceived certificates executed by the Secretary or Assistant Secretary of Buyercertifying:

##  

### (a)                                  theresolutions duly adopted by the Board of Directors of Buyer authorizing the executionof this Agreement and the execution, performance and delivery of allagreements, documents and transactions contemplated hereby; and

###  

### (b)                                 theincumbency of the officers of each entity executing this Agreement and allagreements and documents contemplated hereby.

###  

## 8.6                                 Opinionof Buyer’s Legal Counsel.  Sellershall have received from Shearman & Sterling LLP, legal counsel to theBuyer, an opinion opining to the matters set forth in Exhibit H.

##  

## 8.7                                 BuyerGood Standing Certificates.  Sellershall have received certificates from the Delaware Secretary of Statecertifying that Buyer is in good standing in such jurisdiction.

##  

## 8.8                                 SellerStockholder Approvals.  The AssetPurchase and this Agreement shall have been duly and validly approved andadopted, as required by Applicable Law and Seller’s Certificate ofIncorporation and Bylaws, each as in effect on the date of such approval andadoption, by the requisite vote or written consent of the Seller Stockholdersand by the requisite written consent of holders of the Seller ConvertibleNotes.

##  

## 8.9                                 Billof Sale and Assumption Agreement. Buyer shall have executed and delivered counterparts of the Bill of Saleand Assumption Agreement.

##  

## 8.10                           IntellectualProperty Assignments.  Seller shallhave received from Buyer:  (i)  theTrademark and Domain Name Assignments, executed on Buyer’s behalf by anauthorized officer of Buyer with his or her execution notarized, in a formacceptable for recording with the United States Patent and Trademark Office orapplicable domain name registrar, and any foreign offices, as applicable;(ii) the Patent Assignments, executed on Buyer’s behalf by an authorizedofficer of Buyer with his or her execution notarized, in a form acceptable forrecording with the United

 

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States Patent and Trademark Office, and any foreign offices, asapplicable; and (iii) the Other Instruments.

 

8.11                           BuyerAncillary Agreements.  Buyer shallhave executed and delivered counterparts of each of the Ancillary Agreementsnot referenced above to which Buyer is a signatory and provided alldeliverables and performed all obligations required to be completed by Buyerprior to or at the Closing under all of the Buyer Ancillary Agreements.

 

8.12                           InitialPayment.  Buyer shall have paid theportion of the Initial Payment payable at the Closing in the mannercontemplated by Section 2.2(b) (provided that, in accordance withSections 2.3 and 2.4, the Escrow Cash and Holdback Cash will not bedelivered to the Telos Sellers at the Closing but will instead be delivered asprovided and subject to the terms of Article 2.3 and Section 2.8,respectively).

 

8.13                           EscrowCash and Working Capital Adjustment Cash. Buyer shall have deposited the Escrow Cash and Working CapitalAdjustment Cash in the Escrow Account with the Escrow Agent in the mannercontemplated by Sections 2.3 and 2.4.

 

8.14                           EmploymentMatters.  The Buyer shall haveexecuted and delivered an employment agreement with Mr. Jack Mar, acceptable toMr. Mar, which shall not have been revoked.

 

ARTICLE 9CONDITIONS TO OBLIGATIONS OF BUYER

 

Buyer’s obligations to consummate the Asset Purchaseand take the other actions required to be taken by them at the Closing aresubject to the fulfillment or satisfaction, as of the Closing, of each of thefollowing conditions (it being understood that (a) any one or more of thefollowing conditions may be waived by Buyer in a writing signed by Buyer and(b) by proceeding with the Closing, Buyer shall be deemed to have waivedany of such conditions that remains unfulfilled or unsatisfied):

 

9.1                                 Accuracyof Representations and Warranties. Subject to the Seller Disclosure Letter, the representations andwarranties of Seller set forth in Article 4 shall be true and correct onand as of the Closing with the same force and effect as if they had been madeon the Closing Date (except for any such representations or warranties that bytheir terms speak only as of a specific date or dates, in which case suchrepresentations and warranties shall be true and correct on and as of suchspecified date or dates) except to the extent the failure of any suchrepresentations and warranties to be so true and correct does not have aMaterial Adverse Effect on Seller, and at the Closing Buyer shall have receiveda certificate to such effect executed by Seller’s President or Chief ExecutiveOfficer.

 

9.2                                 Covenants.  Seller shall have performed and complied inall material respects with all of its covenants contained in Article 6 ator before the Closing (to the extent that such covenants require performance bySeller at or before the Closing), and at the Closing Buyer shall have receiveda certificate to such effect executed by Seller’s President or Chief ExecutiveOfficer.

 

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9.3                                 NoMaterial Adverse Change.  Thereshall not have been any Material Adverse Change in Seller occurring between thedate of this Agreement and the Closing and at the Closing Buyer shall havereceived a certificate to such effect executed by Seller’s President or ChiefExecutive Officer.

 

9.4                                 Compliancewith Law; No Legal Restraints; No Litigation.  There shall not be issued, enacted or adopted, or threatened inwriting by any Governmental Authority, any order, decree, temporary,preliminary or permanent injunction, legislative enactment, statute,regulation, action, proceeding, or any judgment or ruling by any GovernmentalAuthority that prohibits or renders illegal or imposes limitations on the AssetPurchase or any other material transaction contemplated by this Agreement.  No litigation or proceeding shall bethreatened or pending for the purpose or with the probable effect of enjoiningor preventing the consummation of any of the transactions contemplated by thisAgreement.

 

9.5                                 GovernmentConsents.  There shall have beenobtained at or prior to the Closing Date such permits or authorizations, andthere shall have been taken all such other actions by any GovernmentalAuthority or other regulatory authority having jurisdiction over the partiesand the actions herein proposed to be taken, as may be required to consummatethe Asset Purchase, including requirements under applicable federal and statesecurities laws.

 

9.6                                 SecretaryCertificates.  Buyer shall havereceived certificates executed by the Secretary or Assistant Secretary ofSeller certifying:

 

(a)                                  theresolutions duly adopted by the Board of Directors of Seller and by thestockholders of Seller authorizing the execution of this Agreement and theexecution, performance and delivery of all agreements, documents andtransactions contemplated hereby; and

 

(b)                                 theincumbency of the officers of each entity executing this Agreement and allagreements and documents contemplated hereby.

 

9.7                                 Opinionof Seller’s Legal Counsel.  Buyershall have received from Fenwick & West LLP, U. S. legal counsel to Seller,an opinion opining to the matters set forth in Exhibit I-1, from McCarthyTetrault LLP, Canadian legal counsel to Seller, an opinion opining as to thematters set forth in Exhibit I-2 and from Conyers, Dill & Pearman,Bermuda legal counsel to Seller, an opinion opining as to the matters set forthin Exhibit I-3.

 

9.8                                 Consents.  Buyer shall have received duly executedcopies of those third party consents, approvals, assignments, notices, waivers,authorizations or other certificates set forth in Schedule 9.8 attachedhereto.

 

9.9                                 SellerStockholder Approvals.  The AssetPurchase and this Agreement shall have been duly and validly approved andadopted, as required by Applicable Law and Seller’s Certificate ofIncorporation and Bylaws, each as in effect on the date of such approval andadoption, by the requisite vote or written consent of the Seller Stockholdersand by the requisite written consent of holders of the Seller ConvertibleNotes.

 

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9.10                           Billof Sale and Assumption Agreement. Each Telos Seller shall have executed and delivered counterparts of theBill of Sale and Assumption Agreement.

 

9.11                           IntellectualProperty Assignments.  Buyer shall havereceived from Telos Sellers:  (i) the Trademark and Domain Name Assignments, executed on Telos Sellers’ behalf byan authorized officer of each Telos Seller with his or her execution notarized,in a form acceptable for recording with the United States Patent and TrademarkOffice or applicable domain name registrar; (ii) the Patent Assignments,executed on Telos Sellers’ behalf by an authorized officer of each Telos Sellerwith his or her execution notarized, in a form acceptable for recording withthe United States Patent and Trademark Office and (iii)  the OtherInstruments.

 

9.12                           SellerAncillary Agreements.  Telos Sellersshall have executed and delivered counterparts of each of the AncillaryAgreements not referenced above to which a Telos Seller is a signatory andprovided all deliverables and performed all obligations required to becompleted by a Telos Seller prior to or at the Closing under all of the SellerAncillary Agreements.

 

9.13                           EmploymentMatters.  Jack Mar and 60% of theEmployee Offerees (not including Mr. Mar or any Employee Offerees locatedoutside of Canada who are required to relocate as part of the terms of theoffer of employment) shall have accepted the offer of employment with Buyer (ora Subsidiary thereof), which acceptance shall not have been revoked.

 

9.14                           SellerGood Standing Certificates.  Buyershall have received a certificate from the Delaware and California Secretariesof State (with respect to Seller), the province of British Columbia (withrespect to TELOS Engineering Ltd.), and Bermuda (with respect to TELOSEngineering (Bermuda) Ltd.) certifying that such entity is in good standing andthat all applicable Taxes and fees of Seller through and including the ClosingDate have been paid (to the extent that such concepts are applicable in suchjurisdictions).

 

9.15                           FIRPTACertificate.  Buyer shall havereceived certification from Seller of non-foreign status, in accordance withTreasury Regulations under Sections 1445 and 894 of the Code.

 

9.16                           Releaseof Encumbrances.  All Encumbranceson the Purchased Assets arising from or in connection with the Seller SeniorConvertible Notes shall have been irrevocably released.

 

ARTICLE 10TERMINATION OF AGREEMENT

 

10.1                           Terminationby Mutual Consent.  This Agreementmay be terminated at any time prior to the Closing by the mutual writtenconsent of Buyer and Seller.

 

## 10.2                           UnilateralTermination.

##  

(a)                                  EitherBuyer or Seller, by giving written notice to the other, may terminate thisAgreement if a court of competent jurisdiction or other Governmental Authorityshall have issued a nonappealable final order, decree or ruling or taken anyother action, in each case having

 

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the effect of permanently restraining, enjoining or otherwise prohibitingthe Asset Purchase or any other material transaction contemplated by thisAgreement.

 

(b)                                 EitherBuyer or Seller, by giving written notice to the other, may terminate thisAgreement if the Asset Purchase shall not have been consummated by midnight PacificTime on June 30, 2004, which date may be extended by the mutualwritten consent of the parties hereto.

 

(c)                                  EitherBuyer or Seller may terminate this Agreement at any time prior to the Closingif (a) the other has committed a breach of (i) any of itsrepresentations and warranties under Article 4 or Article 5, asapplicable, in any material respect or (ii) any of its covenants underArticle 6 or Article 7, as applicable, materially adversely affecting(or materially delaying) the consummation of the transactions contemplatedhereby and has not cured such breach within twenty business days after theparty seeking to terminate this Agreement has given the other party writtennotice of the material breach and its intention to terminate this Agreement pursuantto this Section 10.2(c) (provided, however, that no suchcure period shall be available or applicable to any such breach which by itsnature cannot be cured) and (b) if not cured on or prior to the ClosingDate, such breach would result in the failure of any of the conditions setforth in Article 9 or Article 8, as applicable, to be fulfilled orsatisfied; provided, however, that the right to terminate this Agreement underthis Section 10.2(c) shall not be available to a party if the party is atthat time in material breach of this Agreement.

 

10.3                           Effectof Termination.  In the event oftermination of this Agreement as provided in Section 10.2, this Agreementshall forthwith become void and there shall be no liability or obligation onthe part of Buyer or Seller or their respective officers, directors,stockholders or affiliates; provided, however, that the provisions of thisSection 10.3 (Effect of Termination) and Article 12 (Miscellaneous)shall remain in full force and effect and survive any termination of thisAgreement.

 

ARTICLE 11SURVIVAL OF REPRESENTATIONS, INDEMNIFICATIONAND REMEDIES; CONTINUING COVENANTS

 

11.1                           Survival.  If the Asset Purchase is consummated, therepresentations, warranties, covenants and agreements of Seller and Buyercontained in this Agreement and the other agreements, certificates anddocuments contemplated hereby shall survive the Closing and remain in fullforce and effect, regardless of any investigation or disclosure made by or onbehalf of any of the parties to this Agreement, until June 30, 2005(the “**Expiration Date**”) providedfurther, that, such expiration shall not affect the rights of any BuyerIndemnified Person or Seller Indemnified Person, as applicable, under thisArticle 11 to seek recovery of Damages (as defined in Section 11.2)arising out of any fraud by Seller or Buyer, as applicable, until theexpiration of the applicable statute of limitations with respect to any suchclaim.  If written notice of a claim ofbreach of representation and warranty has been given prior to the expiration ofthe applicable representation and warranty by a party hereto to another partyhereto, then the relevant representation and warranty shall survive as to suchclaim until such claim has been finally resolved in accordance with thisArticle 11.

 

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11.2                       Agreementof Telos Sellers to Indemnify. Subject to the limitations set forth in this Article 11, from andafter the Closing, each Telos Seller shall, jointly and severally, indemnifyand hold harmless Buyer and its officers, directors, agents, representatives,stockholders and employees, and each person, if any, who controls or maycontrol Buyer within the meaning of the Securities Act or the Exchange Act(each hereinafter referred to individually as a “**Buyer Indemnified Person**” and collectivelyas the “**Buyer Indemnified Persons**”)from and against any and all actual losses, costs, damages, liabilities andexpenses (including reasonable attorneys’ fees, other professionals’ and experts’fees, costs of investigation and court costs), calculated net of any recoveriesunder existing insurance policies (net of any applicable collection costs andreserves, deductibles, premium adjustments and retrospectively rated premiums)and net of the amount of any indemnity and contribution received from thirdparties (hereinafter collectively referred to as “**Damages**”), arising from claims, demands,assertions of liability, or actual or threatened actions, suits or proceedings(whether civil, criminal, administrative or investigative) directly orindirectly arising out of, resulting from or in connection with:  (i) any actual failure of anyrepresentation or warranty made by Seller in this Agreement or in the SellerDisclosure Letter to be true and correct as of the Closing Date (as though suchrepresentation or warranty were made as of the Closing Date, except in the caseof representations and warranties which by their terms speak only as of aspecific date or dates, in which case such representations and warranties shallhave actually failed to be true and correct as of such specified date ordates); (ii) any actual breach of or default in connection with any of thecovenants or agreements made by Seller in this Agreement or in the Seller DisclosureLetter; (iii) Seller’s failure to pay, perform or discharge, when due, anyExcluded Liability; and (iv) any Transaction Expenses of Telos Sellers; ineach case which becomes known to the relevant Buyer Indemnified Person duringthe period of survival of the representations, warranties, covenants andagreements and for which Buyer delivers timely written notice to Seller inaccordance with Sections 11.5 and 11.7 prior to the Expiration Date;provided, however, that, notwithstanding anything herein to the contrary, theBuyer Indemnified Persons shall not have any right to indemnification underthis Article 11 with respect to any Damages arising out of, resulting fromor in connection with any of the matters described in clauses (i) through(iv) above to the extent that Buyer has previously been compensated for suchDamages pursuant to the retention by Buyer of an amount of the Working CapitalAdjustment Cash pursuant to Section 2.8.

 

11.3                           Agreementof Buyer to Indemnify.  From andafter the Closing, Buyer shall indemnify and hold harmless Seller, each of itsSubsidiaries and the respective officers, directors, agents, representatives,stockholders and employees of Telos Sellers, and each person, if any, whocontrols or may control Seller within the meaning of the Securities Act or theExchange Act (each hereinafter referred to individually as a “**Seller Indemnified Person**” and collectivelyas “**Seller Indemnified Persons**”)from and against any and all Damages arising from claims, demands, assertionsof liability, or actual or threatened actions, suits or proceedings (whethercivil, criminal, administrative or investigative) directly or indirectlyarising out of, resulting from or in connection with:  (i) any actual failure of any representation or warrantymade by Buyer in this Agreement to be true and correct as of the date of thisAgreement and as of the Closing Date (as though such representation or warrantywere made as of the Closing Date, except in the case of representations andwarranties which by their terms speak only as of a specific date or dates),(ii) any actual breach of or default in connection with any of thecovenants or agreements made by Buyer in this Agreement, including the Earnout,(iii) Buyer’s failure to pay, perform or discharge, when due, any AssumedLiability; (iv) any Liability arising out of the use or operation

 

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of the Purchased Assets or the conduct of the Business by Buyer and itsAffiliates after the Closing Date; and (v) any Transaction Expenses ofBuyer and its Subsidiaries;  in eachcase which becomes known to a Seller Indemnified Person during the period ofsurvival of the representations, warranties, covenants and agreements and forwhich a Seller Indemnified Person delivers a written notice to Buyer inaccordance with Sections 11.5 and 11.7 prior to the Expiration Date.

 

11.4                           Remediesand Limitations.

 

(a)                                  EscrowCash.  If the Asset Purchase isconsummated, recovery from the Escrow Cash, and the Earnout (solely ascontemplated by Section 11.4(b) below), shall be the sole and exclusiveremedy of the Buyer Indemnified Persons under this Agreement with respect tothe matters listed in  clauses (i)and (ii) of Section 11.2, except in the case of fraud by a Telos Seller.

 

(b)                                 Earnout.  In the case of Damages arising out of orresulting from (i) fraud by a Telos Seller, or (ii) after Buyer hasexhausted or made bona fide indemnification claims upon all the Escrow Cash(after taking into account all other claims for indemnification from the EscrowCash made by Buyer), Buyer shall have the right to set-off any Damages forwhich the Buyer Indemnified Persons are entitled to be indemnified pursuant tothis Article 11 against the amount of any earned but unpaid Earnout.

 

(c)                                  Basket.  Notwithstanding anything contained herein tothe contrary, no Buyer Indemnified Person may receive any recovery in respectof any claim for indemnification that is made pursuant to clauses (i) and(ii) of Section 11.2, and that does not involve fraud by a Telos Sellerunless and until Damages in an aggregate amount greater than US$350,000.00(the “**Basket**”) have beenincurred, paid or properly accrued, following which the Buyer IndemnifiedPersons may make claims for indemnification for those Damages included in theamount of the Basket as well as any and all amounts in excess of the amount ofthe Basket.

 

(d)                                 Buyershall, and shall cause each other Buyer Indemnified Person to use allcommercially reasonable efforts to mitigate any Damages which any BuyerIndemnified Person may suffer in consequence of any matter giving rise to aclaim for indemnification hereunder. Seller shall, and shall cause each other Seller Indemnified Person to,use all commercially reasonable efforts to mitigate any Damages which anySeller Indemnified Person may suffer in consequence of any matter giving riseto a claim for indemnification hereunder.

 

(e)                                  Buyershall not be entitled to recover Damages in respect of any claim, or otherwiseobtain reimbursement or restitution of Damages, more than once with respect toany claim hereunder.

 

(f)                                    Fromand after the Closing, except with respects to claims based on fraud or fornon-cash equitable remedies, the remedies provided in this Article 11shall be exclusive as to any claims by a party under this Agreement or underany other agreement, certificate and document contemplated hereby or arisingout of the transactions provided for herein and therein and shall precludeassertion by any party of any other rights or the seeking of any other remediesagainst another party.

 

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(g)                                 Ifany person entitled to indemnification hereunder is entitled to recover fromany person other than the indemnifying party hereunder, including under anyapplicable insurance policy but excluding from any Taxing authority as a resultof a reduction of such indemnified person’s Tax liability, any amount thatrelates to a matter giving rise to a claim for indemnification underSection 11.2 or 11.3, as applicable, such indemnified person will take allcommercially reasonable steps to recover such amount from such third partyprior to pursuing such claim against the party providing indemnificationhereunder.  If such indemnified personrecovers any such amount from such third party, the amount of Damagesrecoverable under Section 11.2 or 11.3, as applicable, shall be reduced bythe amount of such recovery.

 

11.5                           Noticeof Claim.  As used herein, theterm “**Claim**” means a claimfor indemnification for Damages under this Article 11.  An indemnified party may give notice of aClaim under this Agreement (a “**Notice ofClaim**”) to the Seller, in the case of an Buyer Indemnified Person,and to Buyer, in the case of a Seller Indemnified Person, promptly after suchindemnified party becomes aware of the existence of any potential claim forindemnification under this Article 11, arising from or relating to:

 

(a)                                  Anymatter specified in Section 11.2 or Section 11.3, as applicable; or

 

(b)                                 theassertion, whether orally or in writing, against such indemnified party of aclaim, demand, suit, action, arbitration, investigation, inquiry or proceedingbrought by a third party against such indemnified party (in each such case,a “**Third-Party Claim**”) thatis based on, arises out of or relates to any matter specified inSection 11.2, or Section 11.3, as applicable.

 

The period during which claims may be initiated(the “**Claims Period**”) by theBuyer Indemnified Persons for indemnification either from the Escrow Cashand/or the Earnout with respect to the matters set forth in Section 11.2,or by the Seller Indemnified Persons for indemnification from Buyer withrespect to the matters set forth in Section 11.3, shall commence at theClosing and terminate on the Expiration Date, provided that the Claims Period forindemnification from and against Damages arising out of, resulting from or inconnection with fraud by any Telos Seller or the Buyer shall commence on theClosing and terminate upon the expiration of the applicable statute oflimitations.  Notwithstanding anythingcontained herein to the contrary, any bona fide Claims for Damages specified inany Notice of Claim delivered in accordance herewith prior to expiration of theapplicable Claims Period with respect to facts and circumstances existing priorto expiration of the applicable Claims Period shall remain outstanding untilsuch Claims for Damages have been resolved or satisfied, notwithstanding theexpiration of such Claims Period.  Untilthe expiration of the applicable Claims Period, no delay on the part of anindemnified party in giving a Notice of Claim shall relieve the indemnifyingparty from any of its obligations under this Article 11 unless (and thenonly to the extent that) the indemnifying party is materially prejudicedthereby.

 

11.6                           Defenseof Third-Party Claims.

 

(a)                                  Theindemnified party shall determine and conduct the defense of any Third-PartyClaim, and the costs and expenses incurred by the indemnified party inconnection with such defense or settlement (including reasonable attorneys’ fees,other professionals’ and

 

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experts’ fees and court or arbitration costs) shall be included in theDamages for which the indemnified party may seek indemnification pursuant to aClaim made by any indemnified party hereunder to the extent and subject to thelimits provided in this Article 11.

 

(b)                                 Theindemnifying party shall have the right to receive copies of all pleadings,notices and communications with respect to the Third-Party Claim and may participatein, but not to determine or conduct, any defense of the Third-Party Claim withrespect to the Third-Party Claim.

 

(c)                                  Nosettlement of any such Third-Party Claim with any third party claimant shall bemade and no such settlement shall be determinative of the existence of oramount of indemnifiable Damages relating to such matter, except with the priorwritten consent of the Seller, in the case of any Third-Party Claim for whichany Buyer Indemnified Person is seeking indemnification, or the Buyer, in thecase of any Third-Party Claim for which any Seller Indemnified Person isseeking indemnification.

 

11.7                           Contentsof Notice of Claim.  Each Notice ofClaim given pursuant to Section 11.5 shall contain the followinginformation:

 

(a)                                  thatthe indemnified party has directly or indirectly incurred, paid or properlyaccrued (in accordance with GAAP) or, in good faith, believes it shall have todirectly or indirectly incur, pay or accrue (in accordance with GAAP), Damagesin an aggregate stated amount arising from such Claim (which amount may be theamount of damages claimed by a third party in an action brought against anyindemnified party based on alleged facts, which if true, would give rise toliability for Damages under this Article 11); and

 

(b)                                 abrief description, in reasonable detail (to the extent reasonably available),of the facts, circumstances or events giving rise to the alleged Damages basedon the indemnified party’s good faith belief thereof, including the identityand address of any third-party claimant (to the extent reasonably available)and copies of any formal demand or complaint, the amount of Damages, the dateeach such item was incurred, paid or properly accrued, or the basis for suchanticipated liability, and the specific nature of the breach to which such itemis related.

 

11.8                           Resolutionof Notice of Claim.  Each Notice ofClaim given shall be resolved as follows:

 

(a)                                  UncontestedClaims.  If, within twenty (20)business days after a Notice of Claim is received, the indemnifying party doesnot contest such Notice of Claim in writing as provided inSection 11.8(b), the indemnifying party shall be conclusively deemed tohave consented to the recovery by the indemnified party of all Damages thatarise with respect to the claim described in the Notice of Claim in accordancewith this Article 11, including the forfeiture of Escrow Cash and, withoutfurther notice, to have stipulated to the entry of a final judgment for Damagesagainst the indemnifying party for such amount in any court having jurisdictionover the matter where venue is proper.

 

(b)                                 ContestedClaims.  If the indemnifying partygives the other party written notice contesting all or any portion of a Noticeof Claim within the twenty (20) business day

 

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period specified in Section 11.8(a) (a “**Contested Claim**”) then such Contested Claimshall be resolved by either (i) a written settlement agreement executed bythe Telos Sellers and Buyer or (ii) in the absence of such a writtensettlement agreement within thirty (30) business days following receipt ofthe written notice, by binding arbitration between the Telos Sellers and Buyerin accordance with the terms and provisions of Section 11.8(c).

 

(c)                                  Arbitration.  If the Buyer and the Telos Sellers areunable to resolve a Contested Claim by negotiation, each of Buyer and the TelosSellers agree that any Contested Claim will be submitted to mandatory, finaland binding arbitration before J.A.M.S./ENDISPUTE or its successor (“**J.A.M.S.**”), pursuant to the United StatesArbitration Act, 9 U.S.C., Section 1 et seq. and that any such arbitrationwill be conducted in Santa Clara County, California.  Either Buyer or Seller may commence the arbitration processcalled for by this Agreement by filing a written demand for arbitration withJ.A.M.S. and giving a copy of such demand to each of the other parties to thisAgreement.  The arbitration will beconducted in accordance with the provisions of J.A.M.S’ Streamlined ArbitrationRules and Procedures in effect at the time of filing of the demand forarbitration, subject to the provisions of this Section 11.8.3.  The parties will cooperate with J.A.M.S. andwith each other in promptly selecting an arbitrator from J.A.M.S.’ panel ofneutrals, and in scheduling the arbitration proceedings in order to fulfill theprovisions, purposes and intent of this Agreement.  The parties covenant that they will participate in thearbitration in good faith, and that they will share in its costs in accordancewith subparagraph (i) below.  Theprovisions of this Section 11.8.3 may be enforced by any court ofcompetent jurisdiction, and the party seeking enforcement will be entitled toan award of all costs, fees and expenses, including attorneys’ fees, to be paidby the party against whom enforcement is ordered.  Judgment upon the award rendered by the arbitrator may be enteredin any court having competent jurisdiction.

 

(i)                                     Paymentof Costs.  Buyer on the one hand,and/or Seller, on the other hand, will bear the expense of deposits andadvances required by the arbitrator in equal proportions, but either party mayadvance such amounts, subject to recovery as an addition or offset to anyaward.  The arbitrator shall determinethe party who is the prevailing party and the party who is the non-prevailingparty.  The non-prevailing party shallpay all reasonable costs, fees and expenses related to the arbitration,including reasonable fees and expenses of attorneys, accountants and otherprofessionals incurred by the prevailing party, the fees of each arbitrator andthe administrative fee of the arbitration proceedings.  If such an award would result in manifestinjustice, however, the arbitrator may apportion such costs, fees and expensesbetween the parties in such a manner as the arbitrator deems just andequitable.

 

(ii)                                  Burdenof Proof.  Except as may beotherwise expressly provided herein, for any Contested Claim submitted toarbitration, the burden of proof will be as it would be if the claim werelitigated in a judicial proceeding governed by California law exclusively.

 

(iii)                               Award.  Upon the conclusion of any arbitrationproceedings hereunder, the arbitrator will render findings of fact andconclusions of law and a final written arbitration award setting forth the basisand reasons for any decision reached (the “**Final Award**”) and will deliver such documents to Seller andBuyer, together with a signed copy of the Final Award.  The Final Award will constitute a conclusivedetermination of all issues in question, binding upon Seller and Buyer, andwill include an affirmative statement to such effect.

 

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(iv)                              Timing.  Seller, Buyer and the arbitrator willconclude each arbitration pursuant to this Section 11.8 as promptly aspossible for the Contested Claim being arbitrated.

 

(v)                                 Termsof Arbitration.  The arbitratorchosen in accordance with these provisions will not have the power to alter,amend or otherwise affect the terms of these arbitration provisions or theprovisions of this Agreement.

 

11.9                           ExclusiveRemedy.  Following the Closing,except as specifically otherwise provided in this Agreement, arbitrationconducted in accordance with this Agreement will be the sole and exclusivemeans of resolution of any Contested Claim made pursuant to thisArticle 11.

 

11.10                     Tax Consequences ofIndemnification Payments.  Allpayments (if any) made to a Buyer Indemnified Person or to a Seller IndemnifiedPerson pursuant to any indemnification obligations under this Article 11will be treated as adjustments to the purchase price for tax purposes and suchagreed treatment will govern for purposes of this Agreement, unless otherwiserequired by Applicable Law.

 

ARTICLE 12MISCELLANEOUS

 

12.1                           GoverningLaw.  The internal laws of the Stateof California, applicable to agreements between California residents andentered into and to be performed within California, shall govern the validityof this Agreement, the construction of its terms, and the interpretation andenforcement of the rights and duties of the parties hereto.  The parties hereto hereby irrevocably submitto the exclusive jurisdiction of the courts of the State of California and theFederal courts of the United States of America located within the County ofSanta Clara in the State of California solely in respect of the interpretationand enforcement of the provisions of this Agreement and of the documentsreferred to in this Agreement, and in respect of the transactions contemplatedhereby and thereby (including resolution of disputes underSection 11.8(c)), and hereby waive, and agree not to assert, as a defensein any action, suit or proceeding for the interpretation or enforcement hereofor thereof, that it is not subject thereto or that such action, suit orproceeding may not be brought or is not maintainable in said courts or that thevenue thereof may not be appropriate or that this Agreement or any suchdocument may not be enforced in or by such courts, and the parties heretoirrevocably agree that all claims with respect to such action or proceedingshall be heard and determined in such a California State or Federal court.  The parties hereby consent to and grant anysuch court jurisdiction over the person of such parties and over the subjectmatter of such dispute and agree that mailing of process or other papers inconnection with any such action or proceeding in the manner provided inSection 12.9 or in such other manner as may be permitted by ApplicableLaw, shall be valid and sufficient service thereof.  With respect to any particular action, suit or proceeding, venueshall lie solely in Santa Clara County, California.

 

12.2                           Assignment;Binding Upon Successors and Assigns. The Buyer’s obligations hereunder may not be assigned or delegated bythe Buyer in any manner whatsoever, whether directly or by operation of law orotherwise, except in connection with any acquisition by a third party of theBuyer (through a merger or otherwise) or substantially all of the Buyer’sassets in

 

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which case Buyer shall cause such third party to specifically assumeall of Buyers obligations hereunder; and provided further that Buyer may assignany of its rights, but not any of its obligations hereunder, to one or moredirect or indirect wholly owned subsidiaries of Buyer without the consent ofthe Seller.  Except as set forth in thepreceding sentence, no party hereto may assign any of its rights or obligationshereunder without the prior written consent of the other parties hereto.  This Agreement shall be binding upon andinure to the benefit of the parties hereto and their respective successors andpermitted assigns as set forth herein. Any assignment in violation of this provision shall be void.

 

12.3                           Severability.  If any provision of this Agreement, or theapplication thereof, shall for any reason and to any extent be invalid orunenforceable, then the remainder of this Agreement and the application of suchprovision to other persons or circumstances shall be interpreted so as reasonablyto effect the intent of the parties hereto. The parties further agree to replace such void or unenforceableprovision of this Agreement with a valid and enforceable provision that shallachieve, to the extent possible, the economic, business and other purposes ofthe void or unenforceable provision.

 

12.4                           Counterparts.  This Agreement may be executed in any numberof counterparts, each of which shall be an original as regards any party whosesignature appears thereon and all of which together shall constitute one andthe same instrument.  This Agreementshall become binding when one or more counterparts hereof, individually ortaken together, shall bear the signatures of all parties reflected hereon assignatories.

 

12.5                           OtherRemedies.  Except as otherwiseexpressly provided herein, any and all remedies herein expressly conferred upona party hereunder shall be deemed cumulative with and not exclusive of anyother remedy conferred hereby or by law on such party, and the exercise of anyone remedy shall not preclude the exercise of any other.  The parties hereto agree that irreparabledamage would occur in the event that any of the provisions of this Agreementwere not performed in accordance with their specific terms or were otherwisebreached.  It is accordingly agreed thatthe parties shall be entitled to seek an injunction or injunctions to preventbreaches of this Agreement and to enforce specifically the terms and provisionshereof in any court of the United States or any State having jurisdiction.

 

12.6                           Amendmentsand Waivers.  Any term or provisionof this Agreement may be amended, and the observance of any term of thisAgreement may be waived (either generally or in a particular instance andeither retroactively or prospectively), only by a writing signed by the partyto be bound thereby.  The waiver by aparty of any breach hereof or default in the performance hereof shall not bedeemed to constitute a waiver of any other default or any succeeding breach ordefault.  This Agreement may be amendedby the parties hereto as provided in this Section 12.6 at any time beforeor after adoption of this Agreement by the Seller Stockholders, but, after suchadoption, no amendment shall be made which by Applicable Law requires thefurther approval of the Seller Stockholders without obtaining such furtherapproval.  At any time prior to theClosing, each of Seller and Buyer, by action taken by its Board of Directors,may, to the extent legally allowed, (a) extend the time for theperformance of any of the obligations or other acts of the other,(b) waive any inaccuracies in the representations and warranties made toit contained herein or in any document delivered pursuant hereto, and(c) waive compliance with any of the agreements or conditions for itsbenefit contained herein.

 

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No such waiver or extension shall be effective unless signed in writingby the party against whom such waiver or extension is asserted.  The failure of any party to enforce any ofthe provisions hereof shall not be construed to be a waiver of the right ofsuch party thereafter to enforce such provisions.

 

12.7                           Expenses.  Each party shall bear its respectiveTransaction Expenses.

 

12.8                           Attorneys’Fees.  Should suit be brought toenforce or interpret any part of this Agreement, the prevailing party shall beentitled to recover, as an element of the costs of suit and not as damages,reasonable attorneys’ fees to be fixed by the court (including costs, expensesand fees on any appeal).  The prevailingparty shall be entitled to recover its costs of suit, regardless of whethersuch suit proceeds to final judgment.

 

12.9                           Notices.  All notices and other communicationsrequired or permitted under this Agreement shall be in writing and shall beeither hand delivered in person, sent by facsimile, sent by certified orregistered first-class mail, postage pre-paid, or sent by nationally recognizedexpress courier service.  Such noticesand other communications shall be effective upon receipt if hand delivered orsent by facsimile, three (3) days after mailing if sent by mail, andone (1) day after dispatch if sent by express courier, to the followingaddresses, or such other addresses as any party may notify the other parties inaccordance with this Section 12.9:

 

If to Buyer:

 

UTStarcom, Inc.1275 Harbor Bay Parkway, Suite 100Alameda, CA 94502Attention:  Legal DepartmentFacsimile No.: 510-864-8800Telephone No.:  510-864-8802

 

with a copy to:Shearman & Sterling LLP1080 Marsh RoadMenlo Park, CA 94025Attention:  Carmen Chang, Esq.Facsimile No.: (650) 838-3699Telephone No.: (650) 838-3612

 

If to the Telos Sellers:

 

4600 Jacombs RoadRichmond, BC VCV 3B1CanadaAttention:  PresidentFacsimile No.: (604) 303-8557Telephone No.: (604) 303-2316

 

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with a copy to:

 

Fenwick & West LLPEmbarcadero Center West275 Battery StreetSan Francisco, CA 94111Attention:                      DavidMichaels, Esq.Lynda M. Twomey, Esq.Facsimile No.: (415) 281-1350Telephone No.: (415) 875-2300

 

12.10                     Interpretation; Rules ofConstruction.  When a reference ismade in this Agreement to Exhibits, such reference shall be to anExhibit to this Agreement unless otherwise indicated.  When a reference is made in this Agreementto Sections, such reference shall be to a Section of this Agreement unlessotherwise indicated.  When reference ismade in this Agreement to Schedules, such reference shall be to a Schedule tothis Agreement.  When a reference ismade in this Agreement to Articles, such reference shall be to an Article ofthis Agreement unless otherwise indicated. Capitalized terms used in the Exhibits and Schedules and not otherwisedefined therein, shall have the meaning ascribed in this Agreement.  The words “include”, “includes” and “including”when used herein shall be deemed in each case to be followed by the words“without limitation”.  The headingscontained in this Agreement are for reference purposes only and shall notaffect in any way the meaning or interpretation of this Agreement.  Reference to the Subsidiaries of an entityshall be deemed to include all direct and indirect Subsidiaries of suchentity.  The signatories hereto agreethat they have been represented by legal counsel during the negotiation andexecution of this Agreement and, therefore, waive the application of any law,regulation, holding or rule of construction providing that ambiguities in anagreement or other document shall be construed against the party drafting suchagreement or document.

 

12.11                     No Joint Venture.  Nothing contained in this Agreement shall bedeemed or construed as creating a joint venture or partnership between any ofthe parties hereto.  No party is byvirtue of this Agreement authorized as an agent, employee or legalrepresentative of any other party.  Noparty shall have the power to control the activities and operations of anyother and their status is, and at all times shall continue to be, that ofindependent contractors with respect to each other.  No party shall have any power or authority to bind or commit anyother party.  No party shall hold itselfout as having any authority or relationship in contravention of thisSection 12.11.

 

12.12                     Further Assurances.  Each party agrees to cooperate fully withthe other parties and to execute such further instruments, documents andagreements and to give such further written assurances as may be reasonablyrequested by any other party to evidence and reflect the transactions describedherein and contemplated hereby and to carry into effect the intents andpurposes of this Agreement.

 

12.13                     Third Party Beneficiary Rights.  No provisions of this Agreement areintended, nor shall be interpreted, to provide or create any third partybeneficiary rights or any other rights of any kind in any client, customer,employee, affiliate, stockholder, partner or any party hereto or any otherPerson unless specifically provided otherwise herein and, except as soprovided, all

 

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provisions hereof shall be personal solely between the parties to thisAgreement; except that Article 11 is intended to benefit the Persons setforth herein.

 

12.14                     Public Announcement.  Prior to the publication of a mutuallyagreed press release or the inclusion of mutually agreed disclosure in a pressrelease issued by Buyer, neither party shall make any public announcementrelating to this Agreement or the transactions contemplated hereby (except asmay be required by law or to obtain necessary third party consents or to itsBoard of Directors or its advisors) and Seller shall use its reasonable effortsto prevent any trading in shares of securities issued by Buyer by its officers,directors, employees, stockholders and agents prior to the Closing.

 

12.15                     Confidentiality.  Seller and Buyer each confirm that they haveentered into the Mutual NDA and that they are each bound by, and shall abideby, the provisions of such Mutual NDA; provided, however, that Buyer shall notbe bound by such Mutual NDA after the Closing. If this Agreement is terminated, the Mutual NDA shall remain in fullforce and effect, and all copies of documents containing confidentialinformation of a disclosing party shall be returned by the receiving party tothe disclosing party or be destroyed, as provided in the Mutual NDA.

 

12.16                     Entire Agreement.  This Agreement, the exhibits and scheduleshereto, Seller Ancillary Agreements, the Buyer Ancillary Agreements constitutethe entire understanding and agreement of the parties hereto with respect tothe subject matter hereof and supersede all prior and contemporaneousagreements or understandings, inducements or conditions, express or implied,written or oral, between the parties with respect hereto other than the MutualNDA.  The express terms hereof controland supersede any course of performance or usage of the trade inconsistent withany of the terms hereof.

 

12.17                     Waiver of Jury Trial.  EACH OF BUYER AND EACH TELOS SELLER HEREBYIRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING ORCOUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF ORRELATING TO THIS AGREEMENT OR THE ACTIONS OF BUYER AND THE TELOS SELLERS IN THENEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.

 

[SIGNATURE PAGE NEXT]

 

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IN WITNESS WHEREOF, the parties hereto have executedthis Agreement as of the date first above written.

 
| **UTSTARCOM,  INC.**                                  | **TELOS  TECHNOLOGY, INC.**          |         |
|-------------------------------------------------------|--------------------------------------|--------------|
|                                                  |                                 |         |
| By:                                                   | /s/ Michael J.  Sophie               |         |   | By: | /s/ Jack Mar |   |
|                                                  |                                 |         |
| Name:   Michael J. Sophie                        | Name:                                |         | Jack Mar |   |
|                                                  |                                 |         |
| Title:  Chief  Financial Officer and SVP Finance | Title:                               |         |   |
|                                                  |                                 |         |
|                                                  | **TELOS TECHNOLOGY (BERMUDA)  LTD.** |
|                                                  |                                 |         |
|                                                  | By:                                  | /s/ Jack Mar |   |
|                                                  |                                 |         |
|                                                  | Name:                                |         | Jack Mar |   |
|                                                  |                                 |         |
|                                                  | Title:                               |         |   |
|                                                  |                                 |         |
|                                                  | **TELOS TECHNOLOGY (CANADA),  INC.** |
|                                                  |                                 |         |
|                                                  | By:                                  | /s/ Jack Mar |   |
|                                                  |                                 |         |
|                                                  | Name:                                |         | Jack Mar |   |
|                                                  |                                 |         |
|                                                  | Title:                               |         |   |
|                                                  |                                 |         |
|                                                  | **TELOS ENGINEERING LIMITED**        |         |
|                                                  |                                 |         |
|                                                  | By:                                  | /s/ Jack Mar |   |
|                                                  |                                 |         |
|                                                  | Name:                                |         | Jack Mar |   |
|                                                  |                                 |         |
|                                                  | Title:                               |         |   |
|                                                       |                                      |              |  |  |  |  |  |  |  |  |  |

 

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