**Exhibit 10.13**

 

**BIO-keyInternational, Inc.**

**3349Highway 138Building D Suite BWall, NJ 07719**

 

January 23, 2006

 

Aether Systems, Inc

621 E. Pratt Street, Suite 601

Baltimore, Maryland 21202

 

Ladies and Gentlemen:

 

1.                                       References.

 

Reference is made to that certain letteragreement dated as of September 30, 2004 (the “Agreement”) by andbetween BIO-key International, Inc. (“BIO-key”) and Aether Systems, Inc.(“Aether”) relating to BIO-key’s deposit with Aether of $1,000,000 incash to serve as part of the collateral supporting Aether’s letter ofcredit in favor of Hamilton County, Ohio (such $1,000,000, the “HamiltonCash Collateral”).

 

Reference is made to that certain subleasedated as of September 30, 2004 by and between BIO-key and Aether relatingto the sublease of premises known as Marlborough Corporate Place III inMarlborough, Massachusetts (the “Sublease”).

 

Reference is made to that certainsubordinated secured promissory note dated as of September 30, 2004 issuedby BIO-key and Public Safety Group, Inc. in favor of Aether (the “Note”).

 

Reference is made to that certain letteragreement dated as of September 30, 2004 (the “Side-Letter”) by andbetween BIO-key and Aether relating to the Glenborough Letter of Credit Number3038323 (the “Glenborough LC”)

 

Capitalized terms used in this letteragreement without definition shall have the respective meanings ascribed tothem in the Agreement, the Sublease, the Note or the Side-Letter, asapplicable.

 

2.                                       Return ofHamilton Cash Collateral.

 

At the request of BIO-key, and inconsideration of agreements, and subject to the satisfaction of the conditions,set forth in this letter agreement, Aether shall allow for the return toBIO-key of up to 100% of the Hamilton Cash Collateral as follows:

 

a.                                       Aetherwill remit to BIO-key, from time to time, such portion of the Hamilton CashCollateral (up to 100% of the Hamilton Cash Collateral, in the aggregate) as isequal to the amount received by Aether from BIO-key, following the EffectiveDate (as defined below) of this letter agreement, of (i) Rent andAdditional Rent under the Sublease, and (ii) interest and Hamilton Feesunder the Note. Aether will remit the requisite portion of the Hamilton CashCollateral to BIO-key within two business days of the later of (i) BIO-key’swritten request therefor and (ii) Aether’s receipt of a payment fromBIO-key that entitles BIO-key to receive a return of any portion of theHamilton Cash Collateral.

 

b.                                      Aetherwill retain custody and control of the Hamilton Cash Collateral in accordancewith, and subject to, the Agreement, and in no event shall the payments byAether to BIO-key pursuant to subsection (a) above exceed $1,000,000or include the funds held by Aether as a deposit under the Sublease.

 

c.                                       Theprovisions of this paragraph 2 shall terminate and shall have no further forceor effect if BIO-key defaults on, or fails to make timely payments under, theAgreement, the Note, the Sublease, the APA (as defined below) or any of theother Ancillary Agreements (as such term is defined in the APA).

 

3.                                       Representations and Warranties of BIO-key.

 

BIO-key hereby represents and warrants to Aetherthat, as of the date hereof, it (i) has delivered to Aether a true andcomplete copy of BIO-key’s cash-flows statement for the period ended December 31,2005 to June 30, 2006, (ii) has not received any notice, nor does ithave any reason to believe, that it is currently in default under the HamiltonSales Agreement (as that term is used in the Agreement), and (iii) hasobtained all necessary approvals required to be obtained by BIO-key inconnection with the execution and delivery of this letter agreement and thetransactions contemplated hereby.

 

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4.                                       Conditions to Aether’s Obligations.

 

BIO-key and Aether hereby acknowledge and agree thatAether has entered into this letter agreement at the request of BIO-key andnothing hereunder relinquishes or reduces Aether’s right to seek recovery forbreaches or violations of this letter agreement, the Agreement, the AssetPurchase Agreement, dated as of August 16, 2004, by and among Aether,Cerulean Technologies, Inc., SunPro, Inc. and BIO-key (the “APA”),the Sublease, the Note (including with respect to all collateral securing theNote) or any of the other Ancillary Agreements.

 

Aether’s obligations under this letter agreement aresubject to (i) the representations and warranties of BIO-key set forth inparagraph 4 above being true and correct, (ii) BIO-key’s receipt of atleast $1,000,000 in additional equity or unsecured debt financing from TheShaar Fund, Ltd. and/or other institutional financiers; provided, that suchadditional financing shall not require any waiver or consent by Aether, in itscapacity as a creditor of BIO-Key, or any amendment of any of the Note or anyof the related credit documents to which Aether is party, except, in each case,as shall be acceptable to Aether in its sole discretion, (iii) BIO-key’susing reasonable commercial efforts to obtain terms more favorable to BIO-keyunder its currently outstanding institutional debt financings and usingreasonable commercial efforts to obtain a forbearance agreement with The ShaarFund and Laurus Master Fund Ltd. relating to payments of principal during 2006under Bio-Key’s existing financing arrangements, excluding payments made underthe Note, (iv) the execution by BIO-key and delivery to Aether of anamendment to the Note giving effect to the matters specified in paragraph 5below, (v) the receipt of all necessary consents to permit the foregoingamendment to the Note, and (vi) payment by BIO-key to Aether of an amountequal to the reasonable legal fees incurred by Aether in connection with theexecution and delivery of this Agreement. The “Effective Date” of this letteragreement shall be the date on which the last of these conditions shall havebeen satisfied.

 

5.                                       Amendment of the Note.

 

As a material inducement to Aether to enter intothis letter agreement, the parties have agreed to amend the Note as follows:

 

a.                                       The principal amount due and payable toAether under the Note shall be increased from $6,884,588 to $7,884,558.

 

b.                                      No interest shall accrue on the Notefollowing the Effective Date with respect to amounts in excess of $6,884,588 ,unless and only to the extent that BIO-key receives payment from Aetherpursuant to paragraph 2 of this letter agreement.

 

c.                                       If Aether, in its sole discretion, agrees toextend the Hamilton LC beyond December 31, 2006 and to extend the paymentdate under the Note to correspond to such extension, then BIO-key hereby agreesto pay Aether a letter of credit fee equal to 2% of the amount of the HamiltonLC (the “LC Extension Fee”), which shall be payable on the effectivedate of such extension by Aether. If Aether should decide to extend theHamilton LC for more than six months (either in a single extension or as aresult of multiple extensions), an additional LC Extension Fee will be due andpayable on each six-month anniversary of such extension period following December 31,2006, and each LC Extension Fee shall be deemed earned when due and shall notbe subject to any pro-ration or reduction if the Hamilton LC or the Note isterminated, expires, is drawn upon or is reduced in amount any time prior tosix months following the date of payment of an LC Extension Fee. For theavoidance of doubt, the LC Extension Fee shall be in addition to, and not inlieu of, the Hamilton Fees. Notwithstanding anything to the contrary in thisparagraph 4(c), if (i) BIO-key is able to reduce the amount outstandingunder the Hamilton LC by at least fifty -percent (50%) as of September 30,2006 and (ii) BIO-key has timely made all payments required under the Noteand the Sublease in accordance with the terms of such agreements, the initialLC Extension Fee shall be equal to 1% of the amount of the Hamilton LC (the “ReducedLC Extension Fee”). If BIO-key qualifies for the Reduced LC Extension Feeand if Aether should decide to extend the Hamilton LC for more than six months(either in a single extension or as a result of multiple extensions), BIO-keywill be required to pay the full LC Extension Fee on each six-month anniversaryof such extension period following December 31, 2006.

 

d.                                      If Aether, in its sole discretion, agrees toextend the Hamilton LC beyond December 31, 2006, the termination date ofthe Note shall be automatically extended to such date that is thirty (30) daysfollowing the extended expiration date of the Hamilton LC. In the case ofmultiple extensions of the Hamilton LC by Aether, the termination date of theNote shall automatically be extended to such date that is thirty (30) daysfollowing such extended expiration date of the Hamilton LC.

 

e.                                       In no event shall the Note terminate lessthan thirty (30) days after the expiration of the Hamilton LC.

 

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6.                                       Amendment of the Side-Letter.

 

As a material inducement to Aether to enter intothis letter agreement, the parties have agreed to amend the Side-Letter asfollows:

 

a.                                       If BIO-key defaults on, or fails to maketimely payments under, the Agreement, the Note, the Sublease, the APA or any ofthe other Ancillary Agreements , Aether shall have the right to draw on theCash Collateral (as defined in the Side-Letter) to satisfy any outstandingamounts due from BIO-key to Aether. Aether’s ability to draw on the CashCollateral in the event of a default or failure to pay by BIO-key shall be inaddition to and not in lieu of Aether’s right to draw on Cash Collateral if thelandlord draws on the Glenborough LC.

 

b.                                      The undrawn balance of the Cash Collateral,if any, shall be transferred to BIO-key upon the termination of the GlenboroughLC.

 

7.                                       Other Agreements and Obligations Not Affected.

 

All other current agreements and obligations betweenthe parties remain in full force and effect and are not affected by this letteragreement.

 
| Sincerely,                       |
|----------------------------------|
|                             |   |   |
| BIO-KEY INTERNATIONAL, INC. |
|                             |   |
| By:                              |   | /s/ Thomas J. Colatosti |   |
|                             | Thomas J. Colatosti, Chairman |
|                                  |  |  |  |  |  |

 

Agreedand accepted by a duly authorized officer

ofthe undersigned:

 
| AETHER SYSTEMS, INC. |
|---------------------------|
|                      |
| By:                       |  /s/ David C. Reymann |   |
|                      | Name: David C. Reymann |   |
|                      | Title: Chief Financial Officer |
|                           |  |  |  |

 

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