EMPLOYMENT
AGREEMENT




Peerless
Systems Corporation, a Delaware Corporation, (the “Company”) and its
successors and assigns, and Edward M. Gaughan, a natural person (“Executive”)
(collectively, the “Parties”), make this
EMPLOYMENT AGREEMENT (“Agreement”) as of
December 3, 2008 (“Commencement
Date”).




RECITALS




1. WHEREAS,
Executive is currently employed by the Company as the Acting
President.




2. WHEREAS,
the Company wishes to employ Executive and Executive wishes to be employed by
Company in said position.




3. WHEREAS,
the Company and Executive thus enter into this Employment Agreement to outline
the terms and conditions of Executive’s new position with Company and except as
set forth herein, simultaneously wish to extinguish any and all obligations owed
by each Party to the other arising out of their prior employment
relationship.




NOW,
THEREFORE, in consideration of the mutual covenants and agreements hereinafter
set forth, the Company and Executive agree as follows:




AGREEMENT




1.
Employment.




(a) At-Will.  The
Term of this Agreement shall begin on the Commencement Date and shall continue
“at-will” until either party elects to terminate this Agreement pursuant to
Paragraph 5 (the “Term”).




(b) Duties and
Responsibilities.  The Executive will report to William
Neil  (“Neil”), the Board of Directors (the “Board”), or another
appointee of the Board.  Executive shall be employed as Acting
President and Vice President/Head of Salesand shall perform and
discharge well and faithfully the duties which may be assigned to him from time
to time by the Board and/or Neil in connection with the conduct of the Company’s
business as well as those duties which are normally and customarily vested in an
Acting President and Vice President/Head of Sales of a corporation.




Executive’s
job responsibilities shall include, but not be limited to, anything reasonably
requested or required of Executive on behalf of the Company.




(c) Extent of Services and
Business Activities.  Executive shall devote his full-time
efforts to the business of the Company and shall not devote time to other
activities except with the prior consent of the Board of the
Company.  Executive covenants and agrees that for so long as he is
employed by the Company, Executive shall not, whether as an executive, employee,
employer, consultant, agent, principal, partner, member, stockholder, corporate
officer or director, or in any other individual or representative capacity,
whether or not for compensation, engage in or participate in or render services
to any other, provided, however, that,
notwithstanding the foregoing, Executive (a) may invest in securities of any
entity, solely for investment purposes and without participating in the business
thereof, if (x) such securities are traded on any national securities exchange
or the National Association of Securities Dealers, Inc. Automated Quotation
System, and (y) Executive does not, directly or indirectly, own two percent (2%)
or more of any class of securities of such entity.







(d) Location.  During
the Term, Executive shall regularly perform his duties from his home office
located in the state of Kentucky or at the request of the Board, at the
Company’s principal location (the “Headquarters”).  In addition to
spending time at the Headquarters, Executive may be required to travel from time
to time in order to perform his duties hereunder.




2. Compensation.




(a) Base
Salary.  Executive shall be paid an annual base salary (“Base Salary”) during
the Term of two hundred thousand dollars ($200,000.00).  Executive’s
Base Salary shall be payable in installments consistent with the payroll
practices established by the Company with respect to its senior executive
employees.




(b) [*************]1




(c) [*************]2




(d) [*************]3




(e) Payment.  Payment
of all compensation to Executive hereunder shall be made in accordance with the
relevant written Company policies in effect from time to time, including normal
payroll practices, and shall be subject to all applicable employment and
withholding taxes.  This provision shall survive the termination of
Executive’s employment with the Company, for any reason.




3. Other Employment
Benefits.




(a) Business
Expenses.  Upon submission of itemized expense statements, in
the manner as shall be specified by the Company, Executive shall be entitled to
reimbursement for reasonable business and travel expenses duly incurred by
Executive in the performance of his duties under this Agreement, pursuant to
written Company policy and any relevant written policies established by the
Board and provided to Executive.




1 Material omitted pursuant to
Confidentiality Treatment Request with the Securities and Exchange
Commission
 2 Material omitted pursuant to
Confidentiality Treatment Request with the Securities and Exchange
Commission
 3 Material omitted pursuant to
Confidentiality Treatment Request with the Securities and Exchange
Commission






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(b) Benefit
Plans.  To the extent offered by the Company, Executive shall
be entitled to participate, on a basis commensurate with his position, in the
Company’s medical insurance, retirement (e.g.,non-matching 401(k)
plan) and other benefit plans pursuant to their terms and conditions during the
Term of this Agreement. Nothing in this Agreement shall preclude the Company or
any affiliate of the Company from terminating or amending any employee benefit
plan or program from time to time.




(c) Vacation.  Executive
shall be credited with Six Hundred and Sixty-One (661) vacation hours as of the
execution of this Agreement.  Executive agrees to use a minimum of
Eighty (80) of those hours during the 2008 calendar year and another One Hundred
Sixty (160) hours ending the calendar year 2010.  Executive must
exhaust the remaining balance of his vacation bank during the 2011 calendar
year.  Executive acknowledges that he is not entitled to accrue any
further vacation until all vacation balances are exhausted.  However,
once exhausted Executive will again begin to accrue vacation at the rate
applicable to other senior executives of the Company.




(d) No Other
Benefits.  Executive understands and acknowledges that the
compensation and benefits specified in Paragraphs 2 and 3 of this Agreement are
the only compensation and benefits he is entitled to receive under this
Agreement.




4. Confidentiality; Unfair
Competition; Non-Solicitation Agreement.  Concurrent with
Executive’s execution of this Agreement, Executive shall execute and deliver to
the Company a non-disclosure and confidentiality agreement in the form attached
hereto as Exhibit
A (the “Non-Disclosure
Agreement”).  The terms of the Non-Disclosure Agreement are
incorporated by this reference as if set forth in full.




5. Termination of
Employment.




(a) Termination of At-Will
Employment.  Either the Company or Executive may terminate
Executive’s employment at any time with or without advance notice or
cause.  In such an event, Executive will only be entitled to the
Accrued Obligations as set forth below.




(b) Payments Upon
Termination.  If Executive’s employment is terminated for any
reason by either party, the Company shall promptly pay or provide to the
Executive, or his estate, (i) the Executive’s earned but unpaid Base Salary
accrued through the date of termination, (ii) accrued, but unpaid, vacation time
through such date of termination, (iii) any Bonus or Incentive Compensation
required to be paid to the Executive pursuant to this Agreement, to the extent
earned prior to the date of termination and payable, but not previously paid,
(iv) reimbursement of any business expenses incurred by the Executive prior to
the Date of Termination that are reimbursable under Paragraph 3(a) above, and
(v) any vested benefits and other amounts due to Executive under any plan,
program, policy of, or other agreement with, the Company(subsections (i) to (v),
above, are referred to together as the “Accrued
Obligations”).




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(c) Severance
Payments.  In addition, in the event Executive’s employment is
terminated by the Company without Cause (as Cause is defined below) and
Executive executes a general release in favor of the Company in the form
attached hereto as Exhibit “B” no later than thirty (30) days following
Executive’s last day of employment with the Company (but not before Executive’s
last day of employment) Executive shall receive the equivalent of nine (9)
months Base Salary payable in one lump sum within ten (10) business days from
Executive’s full execution of such release agreement less deductions required by
law.  Executive shall also receive reimbursement for nine (9) months
of COBRA premiums for Executive’s existing healthcare coverage and shall have
ninety (90) days from his last day of employment to exercise any vested but
unexercised stock options.




For
purposes of Section 5(c) only, Cause shall be defined as (i) Executive’s
conviction, pleading guilty or no contest with respect to a felony involving
dishonesty or moral turpitude, (ii) Executive’s commission of any act of theft,
fraud, dishonesty, or falsification of any employment or Company records, (iii)
Executive’s engagement in misconduct that is detrimental to the Company’s
reputation or business, (iv) Executive’s refusal without proper legal reason to
substantially perform the duties and responsibilities required of Executive, or
(v) any breach by Executive of any material term of this Agreement (including
without limitation the Non-Disclosure Agreement) and/or of Executive’s fiduciary
duties to the Company.




6. Executive’s Duties Upon
Termination.




(a) Cooperation.  After
notice of termination, Executive shall, at the Company’s expense and subject to
Executive’s professional availability, cooperate with the Company, as reasonably
requested by the Company, to effect a transition of Executive’s responsibilities
and to ensure that the Company is aware of all matters being handled by
Executive.




(b) Return of Company
Property.  Within seven days of the termination of Executive’s
employment under this Agreement for any reason, Executive will return all
Company property in Executive’s possession to the Company.




(c) Resignation of
Office.  On the termination of Executive’s employment for
whatever reason, Executive agrees that Executive shall resign any directorship
or any other offices held by Executive in the Company or any subsidiary of the
Company.




7. Assignment and
Transfer.  Executive’s rights and obligations under this
Agreement shall not be transferable by assignment or otherwise, and any
purported assignment, transfer or delegation thereof shall be
void.  This Agreement shall be assignable by the Company and inure to
the benefit of, and be binding upon and enforceable by, any purchaser of
substantially all of Company’s assets, any corporate successor to Company or any
assignee thereof; provided however that such assignee assumes in writing the
Company’s obligations thereunder.




8. No Inconsistent
Obligations.  This Agreement and the Accompanying
Non-Disclosure Agreement shall represent the sole agreement with Company as to
the subject matter herein, and Executive has no other employment relationship
and is not subject to any other employment agreement with the Company or any
other affiliate of the Company and Executive has no obligations, legal or
otherwise, inconsistent with the terms of this Agreement or with Executive
undertaking employment with the Company.  Executive represents and
warrants that Executive has the right and power to enter into this Agreement, to
perform Executive’s obligations hereunder and by entering into this Agreement
and performing Executive’s obligations hereunder Executive is not in conflict
with any agreement with any third party.  The Company represents and
warrants that the Company has all requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations
hereunder.




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9. Mutual Release of Claims
Under Prior Employment Arrangement.  In exchange and as
consideration for each Party entering into this Agreement, each Party agrees to
release the other from any claims they may have against the other, as stated
below:




(a) Each
Party hereby voluntarily, knowingly and willingly releases, acquits and forever
discharges the other Party including, without limitation, each of their former,
current and future parents, subsidiaries, divisions, affiliates, predecessors,
successors and assigns and all of their current, former and future agents,
employees, officers, directors, shareholders, members, joint ventures,
attorneys, representatives, predecessors, successors, assigns, owners and
servants) from any and all claims, costs or expenses of any kind or nature
whatsoever, whether known or unknown, foreseen or unforeseen, which against any
or all of them any Party ever had, now has or hereinafter may have, against the
other Party, up to and including the date of the Parties’ execution of this
Agreement.




(b) It is
a condition hereof, and it is the Parties intention in the execution of the
General Release in subparagraph 9(a), above, that the same shall be effective as
a bar to each and every claim hereinabove specified, and in furtherance of this
intention, the Parties hereby expressly waive any and all rights and benefits
conferred upon them by Section 1542 of the California Civil Code (or its
Kentucky equivalent), which provides:




A
general release does not extend to claims which the creditor does not know or
suspect to exist in his or her favor at the time of executing the release, which
if known by him or her must have materially affected his or her settlement with
the debtor.




(c)
Executive further acknowledges and agrees that he is not owed any wages,
commissions, bonuses, MBO’s, accrued but unused vacation pay or unreimbursed
business expenses except as set forth herein arising out of or relating to
Executive’s prior employment with the Company.




10. Miscellaneous.




(a) Survival.  The
provisions of this Agreement, including, without limitation Paragraphs 10(c)
(Arbitration), contained herein shall survive the termination of
employment.




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(b) Governing Law. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Kentucky without regard to conflict of law principles.




(c) Arbitration.  With the exception of any claims for workers compensation,
unemployment insurance, claims before any governmental administrative agencies
or claims related to the National Labor Relations Act, any controversy relating
to this Agreement or Employee’s employment shall be settled by binding
arbitration according to the American Arbitration Association’s Employment
Arbitration Rules and Mediation Procedures (available at http://www.adr.org) and
subject to the Federal Arbitration Act and the Federal Rules of Civil Procedure
(including their mandatory and permission rights to discovery.)  This
provision to arbitrate applies to both Company and Executive.  Such
arbitration shall be presided over by a single arbitrator in
Delaware.  Such binding arbitration is applicable to any and all
claims under state and federal employment related statutes including, without
limitation, the Fair Employment and Housing Act, the Age Discrimination in
Employment Act, the Family Medical Leave Act, the Title VII of the Civil Rights
Act and any similar statute law or regulation of the state of Kentucky, as well
as any claims related to a claimed breach of this Agreement.  The
Company shall bear all costs uniquely associated with the arbitration process,
including the arbitrator’s fees where required by law.  The arbitrator
shall have the authority to award any damages authorized by law, including,
without limitation, costs and attorneys’ fees.  The Parties agree to
execute all documents necessary to keep the documents, findings, and award, if
any, of the arbitration confidential, including, without limitation, execution
of a protective order.




(d) Amendment. This
Agreement may be amended only by a writing signed by Executive and by a duly
authorized representative of the Company (other than Executive) as approved by
the Board.




(e) Severability. If any
term, provision, covenant or condition of this Agreement, or the application
thereof to any person, place or circumstance, shall be held to be invalid,
unenforceable or void, the remainder of this Agreement and such term, provision,
covenant or condition as applied to other persons, places and circumstances
shall remain in full force and effect, provided however, that any such provision
found invalid, unenforceable or void shall be deemed amended only to the extent
necessary and shall preserve the intent of the parties hereto.




(f) Construction. The
headings and captions of this Agreement are provided for convenience only and
are intended to have no effect in construing or interpreting this Agreement. The
language in all parts of this Agreement shall be in all cases construed
according to its fair meaning and not strictly for or against the Company or
Executive.




(g) Nonwaiver. No failure
or neglect of either party hereto in any instance to exercise any right, power
or privilege hereunder or under law shall constitute a waiver of any other
right, power or privilege or of the same right, power or privilege in any other
instance. All waivers by either party hereto must be contained in a written
instrument signed by the party to be charged and, in the case of the Company, by
an officer of the Company (other than Executive) or other person duly authorized
by the Company.




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(h) I.R.C.
409A.  Unless otherwise expressly provided, any payment of
compensation by Company to Executive, whether pursuant to this Agreement or
otherwise, shall be made within two and one-half months (21⁄2 months) after the
later of the end of the calendar year of the Company’s fiscal year in which
Executive’s right to such payment vests (i.e., is not subject to a “substantial
risk of forfeiture” for purposes of Code Section 409A of the Internal Revenue
Code of 1986, as amended (“Code”)).  To the extent that any severance
payments come within the definition of “involuntary severance” under Code
Section 409A, such amounts up to the lesser of two times the Executive’s annual
compensation for the year preceding the year of termination or two times the
401(a)(17) limit for the year of termination, shall be excluded from “deferred
compensation” as allowed under Code Section 409A, and shall not be subject to
the following Code Section 409A compliance requirements.  All payments
of “nonqualified deferred compensation” (within the meaning of Section 409A) are
intended to comply with the requirements of Code Section 409A, and shall be
interpreted in accordance therewith. Neither party individually or in
combination may accelerate any such deferred payment, except in compliance with
Code Section 409A, and no amount shall be paid prior to the earliest date on
which it is permitted to be paid under Code Section 409A.  In the
event that Executive is determined to be a “key employee” (as defined in Code
Section 416(i) (without regard to paragraph (5) thereof)) of Company at a time
when its stock is deemed to be publicly traded on an established securities
market, payments determined to be “nonqualified deferred compensation” payable
following termination of employment shall be made no earlier than the earlier of
(i) the last day of the sixth (6th) complete calendar month following such
termination of employment, or (ii) Executive’s death, consistent with the
provisions of Code Section 409A.  Any payment delayed by reason of the
prior sentence shall be paid out in a single lump sum at the end of such
required delay period in order to catch up to the original payment
schedule.   Notwithstanding anything herein to the contrary, no
amendment may be made to this Agreement if it would cause the Agreement or any
payment hereunder not to be in compliance with Code Section 409A.




(i) Notices. All notices,
requests, demands, claims and other communications hereunder will be in
writing.  Any notice, request, demand, claim or other communication
hereunder will be deemed duly given as of the day such information is sent by
registered or certified mail, return receipt requested, postage prepaid, and
addressed to the intended recipient as set forth below:




If to
Executive:




Mr.
Edward M. Gaughan


14605
Woodlake Trace


Louisville,
Kentucky  40245


Tel:
            502-245-3090


Fax:
            502-245-0896




If to
Company:




Peerless
Systems Corporation,


a
Delaware corporation


Attn:  Mr.
William Neil


2381
Rosecrans Avenue, Suite 400


El
Segundo, CA 90245


Tel:
(310) 297-3146




with an
additional copy to (which copy will not constitute notice):





Chairman
of Board


2381
Rosecrans Avenue, Suite 400


El
Segundo, CA 90245




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Any party
may send any notice, request, demand, claim, or other communication hereunder to
the intended recipient at the address set forth above using any other means
(including personal delivery, expedited courier, messenger service, telecopy,
telex, ordinary mail, or electronic mail), but no such notice, request, demand,
claim, or other communication will be deemed to have been duly given unless and
until it is received by the intended recipient (which shall be evidenced by fax
or e-mail confirmation, or registered receipt, or declaration via a
messenger).  Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set
forth.




(i) Assistance in
Litigation. Executive shall, during and after termination of employment,
upon reasonable notice, furnish such information and proper assistance to the
Company as may reasonably be required by the Company in connection with any
litigation in which it or any of its subsidiaries or affiliates is, or may
become a party; provided, however, that such assistance following termination
shall be furnished at mutually agreeable times and for mutually agreeable
compensation.




(j) Employee
Acknowledgment. The undersigned Executive hereby acknowledges that he has
had the option to consult legal counsel in regard to this Agreement, that he has
read and understands this Agreement, that he is fully aware of its legal effect,
and that he has entered into it freely and voluntarily and based on his own
judgment and not on any representations or promises other than those contained
in this Agreement.  Further, Executive hereby agrees to abide by all
federal, state, and local laws, ordinances and regulations.




(k) Counterparts. This
Agreement may be executed in two (2) or more counterparts, each of which will be
deemed an original and all of which together will constitute one and the same
instrument.




(l) Entire Agreement.
This Agreement, previously executed Change of Control Severance Agreement and
the documents referenced herein and executed herewith contain the entire
agreement and understanding between the Parties hereto and supersede any prior
or contemporaneous written or oral agreements, representations and warranties
between them respecting the subject matter hereof.




IN
WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the
date set forth above.




Peerless
      Systems Corporation, Inc. (“Company”)By:     
      /s/ William R.
      Neil
              Name:  William
      R. Neil
              Title:
      Acting Chief Executive Officer and Chief Financial
  OfficerDated: December 10,
      2008/s/ Edward M.
      Gaughan
              
              Mr.
      Edward M. Gaughan (“Executive”)Dated: 
      December 10,
      3008




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