Document:

EXHIBIT 10.38

                          SECURITY INTEREST PROVISIONS

     For purposes of this ANNEX, the terms "Company", "Investor" and "Notes"
have the meanings ascribed to them in the Funding Agreement to which this Annex
is attached.

     Unless otherwise specified, all capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Note.

     Section 1. The Security Interests.

     (A) In order (i) to secure the due and punctual fulfillment of its
obligations, advances, interest or other rights under the Notes, and (ii) to
secure its obligations to the Investor whether now existing or hereafter arising
under the Notes (all of the foregoing hereinafter called "Obligations"), the
Company hereby grants, conveys, transfers and assigns to the Investor a
continuing security interest in the following described personal property
(hereinafter collectively called the "Collateral"):

     All assets and properties of whatever kind and description, including all
     intellectual property, licenses and license rights, now or hereafter owned
     by the Company and all accessions, additions or improvements to, all
     replacements, substitutions and parts for, and all proceeds and products of
     the foregoing; all bank and securities accounts of any kind or nature; all
     books, records and documents relating to the foregoing located at the
     principal place of business or any other place of business of the Company,
     or at such other location as the business may hereafter be located , or
     held by any agent, representative or bailee of the Company wherever
     located, together with a perpetual irrevocable license to Investor and any
     successor to copy, utilize, install and otherwise use any intellectual
     property of Company, and all accessions, additions or improvements useful
     or necessary in connection with the installation, use, configuration,
     maintenance or operation of the Collateral.

     (B) The security interests granted pursuant to this Section 1 (the
"Security Interests") are granted as security only and shall not subject the
Investor to, or transfer or in any way affect or modify, any obligation or
liability of the Company under any of the Collateral or any transaction which
gave rise thereto.

     Section 2. Filing; Further Assurances. The Company will, at its expense,
cause to be searched the public records with respect to the Collateral and will
execute, deliver, file and record (in such manner and form as the Investor may
require), or permit the Investor to file and record, any financing statements,
any carbon, photographic or other reproduction of a financing statement or this
Security Agreement (which shall be sufficient as a financing statement

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hereunder), any specific assignments or other paper that may be reasonably
necessary or desirable, or that the Secured Party may request, in order to
create, preserve, perfect or validate any Security Interest or to enable the
Investor to exercise and enforce its rights hereunder with respect to any of the
Collateral. Effective upon the existence of a Company Event of Default (as
defined below), the Company hereby appoints Investor as Company's
attorney-in-fact to execute in the name and behalf of Company such additional
financing statements as Investor may request.

     Section 3. Representations and Warranties of Company. The Company hereby
represents and warrants to the Investor (a) that, to its knowledge, except as
set forth in Exhibit A attached hereto, and without having made any search or
investigation with respect thereto, the Company is, or to the extent that
certain of the Collateral is to be acquired after the date hereof, will be, the
owner of the Collateral free from any adverse lien, security interest or
encumbrance; (b) to its knowledge, without having made any search or
investigation with respect thereto, that except for such financing statements as
may be described on Exhibit A attached hereto and made a part hereof, no
financing statement covering the Collateral is on file in any public office,
other than the financing statements filed pursuant to this Security Agreement;
(c) that all additional information, representations and warranties contained in
Exhibit B attached hereto and made a part hereof are true, accurate and complete
on the date hereof.

     Section 4. Covenants of Company. The Company hereby covenants and agrees
with the Investor that the Company (a) will, at the Company's sole cost and
expense, defend the Collateral against all claims and demands of all persons at
any time claiming any interest therein junior to the Investor's interest; (b)
will provide the Investor with prompt written notice of (i) any change in the
chief executive officer of the Company or the office where the Company maintains
its books and records pertaining to the Collateral; (ii) the movement or
location of all or a material part of the Collateral to or at any address other
than as set forth in said Exhibit B; and (iii) any facts which constitute a
Company Event of Default, or which, with the giving of notice and/or the passage
of time, could or would constitute a Company Event of Default, pursuant to
Section 7 below; (c) will promptly pay any and all taxes, assessments and
governmental charges upon the Collateral prior to the date penalties are
attached thereto, except to the extent that such taxes, assessments and charges
shall be contested in good faith by the Company; (d) will immediately notify the
Investor of any event causing a substantial loss or diminution in the value of
all or any material part of the Collateral and the amount or an estimate of the
amount of such loss or diminution; (e) will have and maintain adequate insurance
at all times with respect to the Collateral, for such other risks as are
customary in the Company's industry for the respective items included in the
Collateral, such insurance to be payable to the Investor and the Company as
their respective interests may appear, and shall provide for a minimum of ten
(10) days prior written notice of cancellation to the Investor, and Company
shall furnish the Secured Party with certificates or other evidence satisfactory
to the Investor of compliance with the foregoing insurance provisions; (f) will
not sell or offer to sell or otherwise assign, transfer or dispose of the
Collateral or any interest therein, without the prior written consent of the
Investor, except in the ordinary course of business; (g) will keep the
Collateral free from any adverse lien, security interest or encumbrance (except
for encumbrances specified in Exhibit B attached hereto) and in good order and
repair, reasonable wear and tear excepted, and will not waste or destroy the
Collateral or any part thereof; and (h) will not use the Collateral in material
violation of any

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statute or ordinance the violation of which could materially and adversely
affect the Company's business.

     Section 5. Records Relating To Collateral. The Company will keep its
records concerning the Collateral at its offices designated in Exhibit B or at
such other place or places of business of which the Investor shall have been
notified in writing no less than ten (10) days prior thereto. The Company will
hold and preserve such records and chattel paper and will permit representatives
of the Investor at any time during normal business hours upon reasonable notice
to examine and inspect the Collateral and to make abstracts from such records
and chattel paper, and will furnish to the Investor such information and reports
regarding the Collateral as the Investor may from time to time reasonably
request.

     Section 6. General Authority. From and during the term of any Company Event
of Default, the Company hereby appoints the Investor the Company's lawful
attorney, with full power of substitution, in the name of the Company, for the
sole use and benefit of the Investor, but at the Company's expense, to exercise,
all or any of the following powers with respect to all or any of the Collateral:

     (a) to demand, sue for, collect, receive and give acquittance for any and
all monies due or to become due;

     (b) to receive, take, endorse, assign and deliver all checks, notes,
drafts, documents and other negotiable and non- negotiable instruments and
chattel paper taken or received by the Investor;

     (c) to settle, compromise, prosecute or defend any action or proceeding
with respect thereto;

     (d) to sell, transfer, assign or otherwise deal in or with the same or the
proceeds thereof or the related goods securing the Collateral, as fully and
effectually as if the Investor were the sole and absolute owner thereof;

     (e) to extend the time of payment of any or all thereof and to make any
allowance and other adjustments with reference thereto; and

     (f) to discharge any taxes, liens, security interests or other encumbrances
at any time placed thereon;

provided that the Investor shall give the Company not less than ten (10)
business days prior written notice of the time and place of any sale or other
intended disposition of any of the Collateral.

     The exercise by Investor of or failure to so exercise any authority granted
herein shall in no manner affect Company's liability to Investor, and provided,
further, that Investor shall be under no obligation or duty to exercise any of
the powers hereby conferred upon them and they shall be without liability for
any act or failure to act in connection with the collection of, or the
preservation of, any rights under any of the Collateral.

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     Section 7. Company Events of Default. The Company shall be in default under
this Security Agreement upon the occurrence of any of the following events (a
"Company Event of Default"):

               (i)  if any representation or warranty made by the Company in
                    this ANNEX or in any of the Notes, the Funding Agreement or
                    the Registration Rights Agreement, shall be false or
                    misleading in any material respect; or

               (ii) the occurrence of a default by the Company under the Notes
                    or this ANNEX.

     Section 8. Remedies Upon Company Event of Default. If any Company Event of
Default shall have occurred, the Investor may exercise all the rights and
remedies of a Investor under the Uniform Commercial Code. The Investor may
require the Company to assemble all or any part of the Collateral and make it
available to the Investor at a place to be designated by the Investor which is
reasonably convenient. The Investor shall give the Company ten (10) business
days prior written notice of the Investor's intention to make any public or
private sale or sale at a broker's board or on a securities exchange of the
Collateral. At any such sale the Collateral may be sold in one lot as an
entirety or in separate parcels, as the Investor, in its sole discretion, may
determine. The Investor shall not be obligated to make any such sale pursuant to
any such notice. The Investor may, without notice or publication, adjourn any
public or private sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for the sale, and such sale may be made
at any time or place to which the same may be adjourned. The Investor, instead
of exercising the power of sale herein conferred upon it, may proceed by a suit
or suits at law or in equity to foreclose the Security Interests and sell the
Collateral, or any portion thereof, under a judgment or decree of a court or
courts of competent jurisdiction.

     Section 9. Application of Collateral and Proceeds. The proceeds of any sale
of, or other realization upon, all or any part of the Collateral shall be
applied in the following order of priorities: (a) first, to pay the reasonable
expenses of such sale or other realization, including, without limitation,
reasonable attorneys' fees, and all expenses, liabilities and advances
reasonably incurred or made by the Investor in connection therewith, and any
other unreimbursed expenses for which the Investor is to be reimbursed pursuant
to Section 10; (b) second, to the payment of the Obligations in such order of
priority as the Investor, in its sole discretion, shall determine; and (c)
finally, to pay to the Company, or its successors or assigns, or as a court of
competent jurisdiction may direct, any surplus then remaining from such
proceeds.

     Section 10. Expenses; Investor's Lien. The Company will forthwith upon
demand pay to the Investor: (a) the amount of any taxes which the Investor may
have been required to pay by reason of the Security Interests (including,
without limitation, any applicable transfer taxes) or to free any of the
Collateral from any lien thereon; and (b) the amount of any and all reasonable
out-of-pocket expenses, including, without limitation, the reasonable fees and
disbursements of its counsel, and of any agents not regularly in its employ,
which the Investor may incur in

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connection with (i) the preparation of any amendments or modifications of this
Security Agreement, (ii) the collection, sale or other disposition of any of the
Collateral; (iii) the exercise by the Investor of any of the powers conferred
upon it hereunder, or (iv) any default by the Company hereunder.

     Section 11. Termination of Security Interests; Release of Collateral. Upon
the earlier of (i) the repayment and performance in full of all the Obligations,
or (ii) upon the Company securing cash investments of not less than $5,000,000
in new shareholder equity, or (iii) the Security Interests shall terminate and
all rights to the Collateral shall revert to the Company. Upon any such
termination of the Security Interests or release of Collateral, the Investor
will, at the Company's expense, to the extent permitted by law, execute and
deliver to the Company such documents as the Company shall reasonably request to
evidence the termination of the Security Interests or the release of such
Collateral, as the case may be. The Company further covenants and agrees that
notwithstanding such release under subsection (ii), it will not grant any other
security interest or other lien or rights in the Collateral (however
denominated) as long as any of the Notes remain outstanding.

     Section 12. Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (a) personally served,(b)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (c) delivered by reputable air courier service with charges
prepaid, or (d) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice given in accordance herewith. Any notice or
other communication required or permitted to be given hereunder shall be deemed
effective (i) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (ii) on the second business day
following the date of mailing by express courier service or on the fifth
business day after deposited in the mail, in each case, fully prepaid, addressed
to such address, or upon actual receipt of such mailing, whichever shall first
occur. The addresses for such communications shall be:

     If to the Company:     SAC Technologies, Inc.
                            1285 Corporate Center Drive
                            Suite 175
                            Eagan, Minnesota 55121
                            Telephone No.: (651) 687-0414
                            Telecopier No.:

with a copy (which shall not constitute notice) to:

                            The Shaar Fund Ltd.
                            Kaya Flamboyan 9
                            Curacao

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                            Netherlands Antilles
                            (Tel: 599-9-732-2222)
                            (Fax: 599-9-732-2225)

with copies  (which shall not constitute notice) to:

                            Levinson Capital Management, LLC
                            35 East Grassy Sprain Road
                            Suite 300
                            Yonkers, NY 10710
                            Phone number: 914-395-0096
                            Fax number: 914-395-0059

and to:

                            Krieger & Prager, LLP
                            Suite 1440
                            39 Broadway
                            New York, New York 10006
                            Telephone:  (212) 363-2900
                            Facsimile:  (212) 363-2999

Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12 by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other party
hereto.

     Section 13. Miscellaneous.

     (a) No failure on the part of the Investor to exercise, and no delay in
exercising, and no course of dealing with respect to, any right, power or remedy
under this Security Agreement shall operate as a waiver thereof; nor shall any
single or partial exercise by the Investor of any right, power or remedy under
this Security Agreement preclude the exercise, in whole or in part, of any other
right, power or remedy. The remedies in this Security Agreement are cumulative
and are not exclusive of any other remedies provided by law. Neither this
Security Agreement nor any provision hereof may be changed, waived, discharged
or terminated orally but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.

     (b) Unless otherwise defined herein, or unless the context otherwise
requires, all terms used herein which are defined in the New York Uniform
Commercial Code have the meanings therein stated.

     (c) The execution and delivery by Company of this Agreement and all
documents delivered in connection herewith have been duly and validly authorized
by all necessary corporate action of Company and this Agreement and all
documents delivered in connection herewith have been duly and validly executed
and delivered by Company. The execution and delivery by Company of this
Agreement and all documents delivered in connection herewith will not result in
a breach or default of or under the Certificate of Incorporation, By-laws or any
agreement of Company. This Agreement and all documents delivered in connection
therewith

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are legal, valid and binding obligations of Company enforceable against Company
in accordance with their terms.

     (e) In the event that any action is taken by Company or Investor in
connection with this Note, or any related document or matter, the losing party
in such legal action, in addition to such other damages as he or it may be
required to pay, shall pay reasonable attorneys' fees to the prevailing party.

     Section 14. Separability. If any provision hereof shall prove invalid or
unenforceable in any jurisdiction whose laws shall be deemed applicable, the
other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Investor.

     Section 15. Governing Law. This Annex shall be governed by and construed in
accordance with the laws of the State of New York. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on FORUM NON COVENIENS, to the bringing of any such
proceeding in such jurisdictions.

     Section 16. Jury Trial Waiver. The Company and the Investor hereby waive a
trial by jury in any action, proceeding or counterclaim brought by either of the
parties hereto against the other in respect of any matter arising out of or in
connection with the Note or this Annex.

Acknowledged:

SAC TECHNOLOGIES, INC., Company

By:________________________________
Its ________________________________

STATE OF ________________
COUNTY OF ______________

     On the ______ day of ________, 2001, before me personally came
_________________________, to me known, who being by me duly sworn, did depose
and say that he resides at _____________________________________,
__________________; that he is the _______________ of SAC TECHNOLOGIES, INC.,
the corporation described in and which executed the foregoing instrument as
Company; that he was authorized to execute the foregoing instrument on behalf of
said corporation by the Board of Directors of said corporation; and that he
executed the foregoing instrument voluntarily and of his own free will on behalf
of said corporation.

                                             ___________________________________
                                             Notary Public
                                             My commission expires:

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                                    EXHIBIT A

                   FINANCING STATEMENTS ON FILE ON DATE HEREOF

          1.   Financing Statement on Form UCC-1, naming Company, as Debtor, and
               ____________________________ and certain other parties, as
               Secured Party, as filed in the office of the Secretary of State
               of the State of __________ on , 2001. This financing statement
               covers collateral substantially similar to the Collateral and
               represents a security interest senior to the security interest
               granted hereby.

Company represents that, to its knowledge and without having made any search or
investigation, except for the security interest referred to in paragraph 1
above, there are no security interests in the Collateral in favor of any other
party.

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                                    EXHIBIT B

                    ADDITIONAL REPRESENTATIONS AND WARRANTIES

     1.   The exact name of the Company as shown on its Articles of
Incorporation is SAC Technologies, Inc.

     2.   The Company does business under the names: SAC Technologies, Inc. Bio-
Key International

     3.   The Company was incorporated on January 6, 1993 under the laws of the
State of Minnesota and is in good standing under those laws.

     4.   The Chief Executive Officer of the Company is Jeffrey Brown.

     5.   The Company is qualified to transact business in: Minnesota; Nevada

     6.   The Company's only place(s) of business is/are at:

          a.   1285 Corporate Center Drive, Suite 175, Eagan, Minnesota, 55121.

          b.   PMB #192; 4894 W. Lane Mountain Road, Las Vegas, NV 89130-2239

     7.   The Company owns or has an interest in personal property at the
following locations:

         Address                                     Record Owner of Real Estate
         -------                                     ---------------------------

                             [SEE SCHEDULE ANNEXED]

<PAGE>

                                    EXHIBIT C

                       Intellectual Property and LicensesEXHIBIT 10.39

                              EMPLOYMENT AGREEMENT

     THIS AGREEMENT (along with all Exhibits attached hereto hereinafter
referred to as the "Agreement") made effective as of November 20th, 2001 by and
between SAC Technologies, Inc., dba BIO-key International, a Minnesota
corporation with its principal place of business at 1285 Corporate Center Drive,
Suite 175, Eagan, MN 55121 (the "Company") and Mira LaCous, residing at 1567
Antler Point, Eagan, MN 55122 (the "Employee").

                                   WITNESSETH:

     WHEREAS, the Company desires to secure the employment of the Employee as
Vice President in accordance with the provisions of this Agreement; and

     WHEREAS, the Employee desires and is willing to be employed by the Company
in accordance herewith.

     NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties hereto agree as follows:

     1. Employment Term. This Agreement shall remain in force and effect for a
term commencing on the Effective Date hereof and expiring on the first (1st)
anniversary hereof (the "Initial Term"), or until the employment relationship is
terminated pursuant to Section 4 hereof. Upon the expiration of the Initial
Term, this Agreement will be renewed automatically for successive one-year
periods (each, a "Renewal Term"), unless sooner terminated in accordance with
the provisions of Section 4 or unless Company gives written notice of
non-renewal at least one (1) month prior to the date on which the Employee's
employment would otherwise end, in which case paragraph 4(e) takes effect.

     2. Duties; Exclusive Services and Best Efforts.

          (a) Duties. Employee shall hold the position of Vice President of
Technology and Development. At this position, the Employee will have the
responsibility for all core technology, software design and development,
customer support, professional services related to technology implementations,
and participation in corporate strategy activities for the Company including but
not limited to strategic planning, product roll out, beta test development,
budget forecasting as well as any duties assigned to the Employee as directed by
the Company's CEO. Employee working with the CEO will participate in negotiating
contracts and strategic alliances with outside vendors and prospective clients.

<PAGE>

          (b) Exclusive Services and Best Efforts. The Employee agrees to devote
her best efforts, energies and skill to the faithful, competent and diligent
discharge of the duties and responsibilities attributable to her position, and
to this end, will devote her fulltime attention to the business and affairs of
the Company. The Employee also agrees that she shall not take personal advantage
of any business opportunities that arise during her employment that may benefit
the Company. All material facts regarding such opportunities must be promptly
reported to the Company's CEO for consideration. In addition, the Company
acknowledges and agrees that the Employee shall be permitted to engage in and
pursue such contemporaneous activities and interests, as the Employee may
desire, for personal profit or otherwise, provided such activities do not
interfere with the Employee's performance of her duties and obligations
hereunder.

     3. Compensation. On and after the commencement of Employee's employment,
the Employee shall receive, for all services rendered to the Company hereunder,
the following:

          (a) Base Salary. The Employee shall be paid an initial base annual
salary equal to One Hundred Thousand Dollars ($100,000) paid at the rate of
$8,333 per month. The Employee's annual base salary shall be payable in equal
installments in accordance with the Company's general salary payment policies
but no less frequently than monthly. Employee's Base Salary may be increased
annually, or at such other intervals, as the CEO shall determine from time to
time.

          (b) Discretionary Bonus. In addition to Base Salary, a "Discretionary
Bonus" may be awarded to the Employee on the basis of merit performance on an
annual basis in the discretion of the Board of Directors or Compensation
Committee thereof; provided, however, that the failure of the Company to provide
any Discretionary Bonus shall not give rise to any claim against the Company.
The Discretionary Bonus shall not exceed fifty (50%) percent of the Employee's
Base Salary; the Company in its sole discretion shall determine the amount, if
any, and timing of any Discretionary Bonus.

          (c) Incentive Compensation. The Employee may be eligible for awards
from the Company's incentive compensation plans, including without limitation
any stock option plans applicable to high level executives of the Company, in
accordance with the terms thereof and on a basis commensurate with their
position and responsibilities. The Company in its sole discretion shall
determine any such compensation. Nothing herein shall affect any rights or
obligations of the Employee or the Company created pursuant to any stock option
plan or stock option agreement between the parties hereto.

          (d) Stock Options. For this Agreement, Employee shall be granted (i)
subject to the provisions of the Company's 1999 Stock Option Plan attached
hereto as Exhibit A, a stock option to purchase 200,000 shares of the Company's
Common Stock; and (ii) subject to the terms of stock option agreement in
substantially the form attached hereto as Exhibit B, a stock option to purchase
140,000 shares of the Company's Common Stock. Option to purchase Seventy-Five
thousand (75,000) shares shall vest on execution of this Agreement; and two
hundred and sixty-five

<PAGE>

thousand (265,000) shares shall vest in equal monthly installments over a
thirty-six (36) month period.

          (f) Benefits Plans. The Employee shall be eligible to participate in
any and all employee welfare and health benefit plans (including, but not
limited to, life insurance, health, medical and dental plans) and other employee
benefit plans, including but not limited to qualified pension plans, which may
be established by the Company from time to time for the benefit of other Company
employees of comparable status. The Employee shall be required to comply with
the conditions attendant to coverage by such preceding plans and policies and
shall comply with and be eligible for benefits only in accordance with the terms
and conditions of such plans as they may be amended from time to time. Nothing
in this Section shall be construed as requiring the Company to establish or
continue any particular benefit plan in discharge of its obligations under this
Agreement.

          (g) Vacation. The Employee shall be eligible for four (4) weeks of
paid vacation each year of her employment hereunder. Except as required by
applicable law, in no event shall the Employee be entitled to receive any cash
compensation in lieu of unused vacation time.

          (h) Expenses. Subject to and in accordance with the Company's policies
and procedures, and, upon presentation of pre-approved itemized accounts, the
Employee shall be reimbursed by the Company for reasonable and necessary
business-related expenses, which expenses are incurred by the Employee on behalf
of the Company.

          (i) Deductions from Salary and Benefits. The Company will withhold
from any salary or benefits payable to the Employee all federal, state, local,
and other taxes and other amounts as required by law, rule or regulation.

     4. Termination. Either may terminate this Agreement the Employee or the
Company at any time, subject only to the provisions of this Section 4.

          (a) Voluntary Termination. If Employee terminates her own employment,
the Company shall be released from any and all further obligations under this
Agreement, except that the Company shall be obligated to pay Employee her salary
and benefits owing to Employee through the effective date of termination.
Employee shall also be entitled to any reimbursement owed in accordance with
Section 3(h). Employee's obligations under Sections 5, 7, 8 and 9 hereof and
shall survive the termination of Employee's employment, and Employee shall
remain bound thereby.

          (b) Death. This Agreement shall terminate on the date of the
Employee's death, in which event salary, benefits, and reimbursable expenses
owing to the Employee through the date of the Employee's death shall be paid to
her estate.

<PAGE>

          (c) Disability. If, during the term of this Agreement, in the opinion
of the Company, the Employee, because of physical or mental illness or
incapacity or disability, shall become unable to perform substantially all of
the duties and services required of him under this Agreement for a period of
thirty (30) consecutive calendar days or sixty (60) days in the aggregate during
any twelve-month period, the Company may, upon at least ten (10) days prior
written notice given at any time after the expiration of such thirty (30) day or
sixty (60) day period, notify the Employee of its intention to terminate this
Agreement as of the date set forth in the notice. In case of such termination,
the Employee shall be entitled to receive salary, benefits, and reimbursable
expenses owing to the Employee through the date of termination. The Company
shall have no further obligation or liability to the Employee. The Employee's
obligations under Sections 5, 7 8 and 9 hereof shall survive the termination of
Employee's employment, and employee shall remain bound thereby.

          (d) Termination by Employer for Cause. The Company may terminate this
Agreement for "Cause" at any time. Upon such termination for "Cause", the
Company shall be released from any and all further obligations under this
Agreement, except that the Company shall be obligated to pay the Employee her
salary and benefits owing to the Employee through the effective date of such
termination. The Employee shall also be entitled to any reimbursement owed in
accordance with Section 3(h). The Employee's obligations under Sections 5, 7, 8
and 9 hereof shall survive the termination of Employee's employment, and
employee shall remain bound thereby.

          CAUSE. "Cause" for Termination shall include, but is not limited to,
the following conduct of the Employee:

               (i) Breach of any material provision of this Employment Agreement
by the Employee if not cured within two (2) weeks after receiving written notice
thereof;

               (ii) Misconduct as an Employee of the Company, including but not
limited to, misappropriating funds or property of the Company; any attempt to
obtain any personal profit from any transaction in which the Employee has an
interest that is adverse to the Company or any breach of the duty of loyalty and
fidelity to the Company; or any other act or omission of the Employee which
substantially impairs the Company's ability to conduct its ordinary business in
its usual manner;

               (iii) Material neglect or refusal to perform the duties assigned
to the Employee pursuant to this Employment Agreement if not cured within two
(2) weeks after receiving notice thereof;

               (iv) Conviction of a felony or plea of guilty or NOLO CONTENDERE
to a felony;

               (v) Acts of dishonesty or moral turpitude by the Employee that
are detrimental to the Company or any other act or omission which subjects the
Company or any of

<PAGE>

its affiliates to public disrespect, or scandal, or that causes the Company to
be in violation of governmental regulations that subjects the Company either to
sanctions by governmental authority or to civil liability to its employees or
third parties;

               (vi) Disclosure or use of confidential information of the
Company, other than as specifically authorized and required in the performance
of the Employee's duties.

          (e) Termination by Employer Without Cause. Upon termination of this
Agreement without Cause, the Company shall be released from any and all further
obligations under this Agreement, except that the Employee shall continue to be
paid or provided, as applicable, in the same manner as before termination, and
for a period of time ending nine (9) months from the date of termination of the
Employee without Cause, if, and only if, the Employee has completed twelve (12)
months of employment with Company and signs a valid general release of all
claims against the Company, its affiliates, subsidiaries, officers, directors
and agents, in a form provided by the Company. The Employee's obligations under
Sections 5, 7, 8 and 9 hereof shall survive the termination of the Employee's
employment, regardless of the circumstances of any such termination, and the
Employee shall remain bound thereby.

          (f) Termination by Mutual Agreement. This Agreement may be terminated
at any time by mutual agreement of the Employee and the Company.

          (g) Termination by Employee for Cause. Employee for Cause may
terminate this Agreement if Employee's current salary or benefits are reduced by
more than 30%. In the event the Employee terminates employment for Cause,
Employee shall continue to be paid or provided, as applicable, in the same
manner as before termination, and for a period of time ending two (2) months
from the date of termination by Employee without Cause, if, and only if, the
Employee signs a valid general release of all claims against the Company, its
affiliates, subsidiaries, officers, directors and agents, in a form provided by
the Company. The Employee's obligations under Sections 5, 7, 8 and 9 hereof and
shall survive the termination of the Employee's employment, regardless of the
circumstances of any such termination, and the Employee shall remain bound
thereby.

     5. Non-Competition and Business Opportunities.

          (a) Non-Competition. The Employee understands that the Company is in
the business of developing and licensing biometric identification technologies,
and distributing products incorporating such technologies, to original equipment
manufacturers and end users. The Employee agrees that during the period of her
employment hereunder and for a period of one (1) year thereafter, the Employee
will not directly or indirectly: (i) market, sell or perform services such as
are offered or conducted by the Company, its affiliates and subsidiaries during
the period of her employment, to any customer or client of the Company or
"Prospective Customer" or client of the Company; or (ii) engage, directly or
indirectly, whether as principal or as agent, officer, director, employee,
consultant, shareholder, or otherwise, alone or in association with any other
person, corporation or other entity, in any "Competing Business". For

<PAGE>

the purpose of this Section 5(a) "Prospective Customer" shall mean any person
with whom the Company has engaged in any discussion or negotiation regarding the
use of the Company's products or services. For purposes of this Section 5(a),
the term "shareholder" shall exclude any interest owned by Employer in a public
company to the extent the Employer owns less than ten percent (10%) of any such
company's outstanding common stock. For the further purposes of this Agreement,
the term "Competing Business" shall mean any person, corporation or other entity
developing and/or licensing biometric identification technologies or
distributing products incorporating such technologies to original equipment
manufacturers and end users at the time of such termination or non-renewal. Due
to the nature of the markets served and the technology and products to be
developed and marketed by the Company which are intended to be available on a
national basis, the restrictions set forth in this Section 5(a) can not be
limited to a specific geographic area within the United States.

          (b) Business Opportunities. The Employee agrees that during the period
of her employment hereunder, the Employee will not take personal advantage of
any business opportunities that are similar or substantially similar to the
business of the Company. In addition, all material facts regarding any such
business opportunities must be promptly and fully disclosed by the Employee to
the CEO as soon as the Employee becomes aware of any opportunity, and in no
event later than forty-eight (48) hours after learning of such opportunity.
Business opportunities covered by this Section 5(b) include opportunities
relating to the development and licensing of biometric
identification/verification technologies or the distribution of products
incorporating such technologies to original equipment manufacturers,
distributors and end users.

          (c) Non-Solicitation. The Employee agrees that during the period of
employment hereunder and for a period of one (1) year thereafter, the Employee
will not request or otherwise attempt to induce or influence, directly or
indirectly, any present customer, distributor or supplier, or Prospective
Customer, distributor or supplier, of the Company, or other persons sharing a
business relationship with the Company to cancel, to limit or postpone their
business with the Company, or otherwise take action which might be to the
material disadvantage of the Company. The Employee agrees that during the period
of employment hereunder and for a period of one (1) year thereafter, Employee
will not hire or solicit for employment, directly or indirectly, or induce or
actively attempt to influence, hire or solicit, any employee, agent, officer,
director, contractor, consultant or other business associate of the Company to
terminate his or her employment or discontinue such person's consultant,
contractor or other business association with the Company.

          (d) Scope. The parties hereto agree that, due to the nature of the
Company's business, the duration and scope of the non-competition and
non-solicitation provisions set forth above are reasonable. In the event that
any court determines that the duration or the geographic scope, or both, are
unreasonable and that such provisions are to that extent unenforceable, the
parties hereto agree that such provisions shall remain in full force and effect
for the greatest time period and in the greatest area that would not render it
unenforceable. The parties intend that the non-competition and non-solicitation
provisions herein shall be deemed to be a series of separate

<PAGE>

covenants, one for each and every county of each and every state of the United
States of America and each and every political subdivision of each and every
country outside the United States of America where this provision is intended to
be effective. The Employee agrees that damages are an inadequate remedy for any
breach of such provisions and that the Company, shall, whether or not it is
pursuing any potential remedies at law, be entitled to seek in any court of
competent jurisdiction, equitable relief in the form of preliminary and
permanent injunctions without bond or other security upon any actual or
threatened breach of either of these competition provisions. If the Employee
shall violate this Section 5, the duration of this Section 5 automatically shall
be extended as against the Employee for a period equal to the period during
which the Employee shall have been in violation of this Section 5. The covenants
contained in this Section 5 are deemed to be material and the Company is
entering into this Agreement relying on such covenants.

     6. Representations and Warranties of the Employee. The Employee, hereby
represents and warrants to the Company as follows: (i) The Employee has the
legal capacity and unrestricted right to execute and deliver this Agreement and
to perform all of her obligations hereunder; (ii) the execution and delivery of
this Agreement by the Employee and the performance of her obligations hereunder
will not violate or be in conflict with any fiduciary or other duty, instrument,
agreement, document, arrangement, or other understanding to which Employee is a
party or by which she is or may be bound or subject; and (iii) except as set
forth in Exhibit C attached hereto, the Employee is not a party to any
instrument, agreement, document, arrangement, including, but not limited to,
invention assignment agreement, confidential information agreement,
non-competition agreement, non-solicitation agreement, or other understanding
with any person (other than the Company) requiring or restricting the use or
disclosure of any confidential information or the provision of any employment,
consulting or other services.

     7. Disclosure of Innovations; Assignment of Ownership of Innovations;
Protection of Confidential Information. Employee hereby represents and warrants
to the Company that Employee understands that the Company is in the business of
developing and licensing biometric identification technologies, and distributing
products incorporating such technologies, to original equipment manufacturers,
distributors and end users (THE "COMPANY'S BUSINESS") and that Employee may have
access to, generate/create, or acquire information with respect to Confidential
Information (as defined below), including software, processes and methods,
development tools, scientific, technical and/or business innovations.

          (a) Disclosure of Innovations. Employee agrees to disclose in writing
to the Company all inventions, improvements and other innovations of any kind
that Employee may make, conceive, develop or reduce to practice, alone or
jointly with others, during the term of Employee's employment with the Company,
whether or not they are eligible for patent, copyright, trademark, trade secret
or other legal protection ("Innovations"). Examples of Innovations shall
include, but are not limited to, software, discoveries, research, inventions,
formulas, techniques, processes, know-how, marketing plans, new product plans,
production processes, advertising, packaging and marketing techniques and
improvements to computer hardware or software. Such

<PAGE>

innovations disclosed to the Company shall not be disclosed to any other person
or party without the written permission of the Employee.

          (b) Assignment of Ownership of Innovations. Employee acknowledges that
she has been employed by the Company since May 15, 2000 (the "Start Date").
Employee agrees that (i) all Innovations made, conceived, developed or reduced
to practice by Employee, either alone or together with others, at any time after
the Start Date and prior to the date hereof related to biometric
identification/verification technologies are; and (ii) all Innovations made,
conceived, developed or reduced to practice by Employee, either alone or
together with others, at any time on or after the Start Date will be the sole
and exclusive property of the Company and Employee hereby assigns all of
Employee's rights, title or interest in the Innovations and in all related
patents, copyrights, trademarks, trade secrets, rights of priority and other
proprietary rights to the Company, provided however, that Employee does not
assign to the Company any of Employee's rights in any Innovations (i) for which
no equipment, supplies, facility or trade secret information of the Company was
used; (ii) which was developed entirely on Employee's own time; (iii) which does
not relate directly to the Company's Business or to the Company's actual or
demonstrably anticipated research or development; and (iv) which does not result
from any work performed by Employee for the Company. At the Company's request
and expense, during and after the period of Employee's employment with the
Company, Employee will assist and cooperate with the Company in all respects and
will execute documents, and, subject to Employee's reasonable availability, give
testimony and take further acts requested by the Company to obtain, maintain,
perfect and enforce for the Company patent, copyright, trademark, trade secret
and other legal protection for the Innovations. Employee hereby appoints an
authorized officer of the Company as Employee's attorney-in-fact to execute
documents on her behalf for this purpose. Employee has attached hereto as
Exhibit D a list of Innovations as of the date hereof which belong to Employee
and which are not assigned to the Company hereunder (the "Prior Innovations"),
or, if no such list is attached, Employee represents that there are no Prior
Innovations.

          (c) Protection of Confidential Information of the Company. Employee
understands that Employee's work as an employee of the Company creates a
relationship of trust and confidence between Employee and the Company. During
and after the period of Employee's employment with the Company, Employee will
not use or disclose or allow anyone else to use or disclose any "Confidential
Information" (as defined below) relating to the Company, its products, services,
suppliers or customers except as may be necessary in the performance of
Employee's work for the Company or as may be specifically authorized in advance
by appropriate officers of the Company. "Confidential Information" shall
include, but not be limited to, information consisting of research and
development, patents, trademarks and copyrights and applications thereto,
technical information, computer programs, software, methodologies, innovations,
software tools, know-how, knowledge, designs, drawings, specifications,
concepts, data, reports, processes, techniques, documentation, pricing,
marketing plans, customer and prospect lists, trade secrets, financial
information, salaries, business affairs, suppliers, profits, markets, sales
strategies, forecasts, employee information and any other information not
available to the general public, whether written or oral, which Employee knows
or has reason to know the Company would like to treat as confidential for any
purpose, such as maintaining a competitive advantage or avoiding

<PAGE>

undesirable publicity. Employee will keep Confidential Information secret and
will not allow any unauthorized use of the same, whether or not any document
containing it is marked as confidential. These restrictions, however, will not
apply to Confidential Information that has become known to the public generally
through no fault or breach of Employee's or that the Company regularly gives to
third parties without restriction on use or disclosure. If Employee is
subpoenaed or ordered to disclose this information by a Court of competent
jurisdiction, Employee shall promptly inform the Company so that the Company can
determine whether it wants to attempt to quash the subpoena or order. If the
Employee has informed the Company, then it shall not constitute a breach of this
Employment Agreement when or if the Employee responds to or replies to a proper
subpoena or other order of the Court.

     8. WORK MADE FOR HIRE.

          (a) Work Made For Hire. Subject to Paragraph 7 (whose terms shall
control) Employee further recognizes and understands that Employee's duties at
the Company may include the preparation of materials, including without
limitation written or graphic materials, and that any such materials conceived
or written by Employee shall be done as "work made for hire" as defined and used
in the Copyright Act of 1976, 17 U.S.C. ss.ss. 1 et seq. In the event of
publication of such materials, Employee understands that since the work is a
"work made for hire", the Company will solely retain and own all rights in said
materials, including right of copyright. In the event that any of such works
shall be deemed by a court of competent jurisdiction not to be a "work made for
hire," this Agreement shall operate as an irrevocable assignment by Employee to
the Company of all right, title and interest in and to such works, including,
without limitation, all worldwide copyright interests therein, in perpetuity.
The fact that such copyrightable works are created by Employee outside of the
Company's facilities or other than during Employee's working hours with the
Company shall not diminish the Company's right with respect to such works which
otherwise fall within this paragraph. Employee agrees to execute and deliver to
the Company such further instruments or documents as may be requested by the
Company in order to effectuate the purposes of this paragraph.

          (b) Disclosure of Works and Inventions/Assignment of Patents. Subject
to Paragraph 7 (whose terms shall control), in consideration of the promises set
forth herein, Employee agrees to disclose promptly to the Company, or to such
person whom the Company may expressly designate for this specific purpose (its
"Designee"), any and all works, inventions, discoveries and improvements
authored, conceived or made by Employee during the period of employment
commencing from the Start Date and related to the business or activities of the
Company, and Employee hereby assigns and agrees to assign all of Employee's
interest in the foregoing to the Company or to its Designee. Employee agrees
that, whenever she is requested to do so by the Company, Employee shall execute
any and all applications, assignments or other instruments which the Company
shall deem necessary to apply for and obtain Letters Patent or Copyrights of the
United States or any foreign country or to otherwise protect the Company's
interest therein. Such obligations shall continue beyond the termination or
nonrenewal of Employee's employment or service with respect to any works,
inventions, discoveries and/or improvements that are authored, conceived of, or
made by Employee during the period of

<PAGE>

Employee's employment or service, and shall be binding upon Employee's
successors, assigns, executors, heirs, administrators or other legal
representatives.

     9. Company Property. All records, files, lists, including computer
generated lists, drawings, documents, software, documents, equipment, models,
binaries, object modules, libraries, source code and similar items relating to
the Company's business that the Employee shall prepare or receive from the
Company and all Confidential Information shall remain the Company's sole and
exclusive property ("Company Business Property"). Upon termination of this
Agreement, the Employee shall promptly return to the Company all property of the
Company in her possession, including Company Business Property. The Employee
further represents that she will not copy or cause to be copied, print out, or
cause to be printed out any Company Business Property other than as specifically
authorized and required in the performance of the Employee's duties. The
Employee additionally represents that, upon termination of her employment with
the Company, she will not retain in her possession any such Company Business
Property.

     10. Cooperation. The Employee and Company agree that during the term of
Employee's employment they shall, at the request of the other Party, render all
assistance and perform all lawful acts that each Party considers necessary or
advisable in connection with any litigation involving either Party or any
director, officer, employee, shareholder, agent, representative, consultant,
client, or vendor of the Company.

     11. Employment Dispute Settlement Procedure/Waiver of Rights. The Employee
and the Company each agree that, in the event either party (or its
representatives, successors or assigns) brings an action in a court of competent
jurisdiction relating to the Employee's recruitment, employment with, or
termination of employment from the Company, each party in such action agrees to
waive his, her or its right to a trial by jury, and further agrees that no
demand, request or motion will be made for trial by jury.

The parties hereto further agree that, in the event that either seeks relief in
a court of competent jurisdiction for a dispute covered by this Agreement, any
other Agreement between the Employee and the Company or which relates to the
Employee's recruitment, employment with, or termination of employment from the
Company, the defendant or third-party defendant in such action may, at any time
within sixty (60) days of the service of the complaint, third-party complaint or
cross-claim upon such party, at his, her or its option, require all or part of
the dispute to be arbitrated by one arbitrator in accordance with the rules of
the American Arbitration Association. The parties agree that the option to
arbitrate any dispute is governed by the Federal Arbitration Act. The parties
understand and agree that, if the other party exercises his, her or its option,
any dispute arbitrated will be heard solely by the arbitrator, and not by a
court. Judgment upon the award rendered, however, may be entered in any court of
competent jurisdiction. The cost of such arbitration shall be borne equally by
the parties. The terms of this paragraph does not require the parties to use
neutrals or mediators who are members of the American Arbitration Association.

<PAGE>

This dispute resolution agreement will cover all matters directly or indirectly
related to the Employee's recruitment, employment or termination of employment
by the Company; including, but not limited to, claims involving laws against
discrimination whether brought under federal and/or state law and/or local law,
and/or claims involving co-employees but excluding Worker's Compensation Claims.
Nothing contained in this Section 11 shall limit the right of the Company to
enforce by court injunction or other equitable relief the Employee's obligations
under Sections 5, 7, 8 and 9 hereof.

           The right to a trial, and to a trial by jury, is of value.

                  THE EMPLOYEE MAY WISH TO CONSULT AN ATTORNEY
                  PRIOR TO SIGNING THIS AGREEMENT. IF SO, THE
                  EMPLOYEE SHOULD TAKE A COPY OF THIS AGREEMENT
                  WITH HER.

     12. Choice of Law and Jurisdiction. This Agreement shall be construed,
interpreted and the rights of the parties determined in accordance with the laws
of the State of Minnesota. Each of the parties hereto hereby irrevocably
consents and submits to the exclusive jurisdiction of the state courts of the
State of Minnesota, and of the United States District Court for the District of
Minnesota in connection with any suit, action, or other proceeding concerning
this Agreement or enforcement of Sections 5, 7, 8 and 9 hereof. The Employee
waives the right to a jury trial and agrees to accept service of process by
certified mail at the Employee's last known address, if there is proof of
receipt by the Employee (at a minimum, return receipt requested).

     13. Successors and Assigns. The Employee hereunder, may assign neither this
Agreement, nor any of the Employee's rights, powers, duties or obligations. This
Agreement shall be binding upon and inure to the benefit of the Employee and her
heirs and legal representatives and the Company and its successors. Successors
of the Company shall include, without limitation, any company or companies,
individuals, groups, associations, partnerships, firm, venture or other entity
or party acquiring, directly or indirectly, all or substantially all of the
assets of the Company, whether by merger, consolidation, purchase, lease or
otherwise. Any such successor referred to in this paragraph shall thereafter be
deemed "the Company" for the purpose hereof. All covenants and restrictions upon
the Employee hereunder, including, but not limited to Sections 5, 7, 8 and 9
hereof, are specifically assignable by the Company.

     14. Waiver. Any waiver or consent from the Company with respect to any term
or provision of this Agreement or any other aspect of the Employee's conduct or
employment shall be effective only in the specific instance and for the specific
purpose for which given and shall not be deemed, regardless of frequency given,
to be a further or continuing waiver or consent. The failure or delay of the
Company at any time or times to require performance of, or to exercise any of
its powers, rights or remedies with respect to any term or provision of this
Agreement or any other aspect of the Employee's conduct or employment in no
manner (except as otherwise expressly provided herein) shall affect the
Company's right at a later time to enforce any such term or provision.

<PAGE>

         15. Notices. All notices, requests, demands, and other communications
hereunder must be in writing and shall be deemed to have been duly given if
delivered by hand or mailed within the continental United States by first class,
registered mail, return receipt requested, postage and registry fees prepaid, to
the applicable party and addressed as follows:

                  (a)      If to the Company:

                           SAC Technologies, Inc., dba: BIO-key International
                           1285 Corporate Center Drive, Suite 175
                           Eagan, MN 55121
                           Attn:  Chief Executive Officer
                           With a copy to:

                           Buchanan Ingersoll Professional Corporation
                           Eleven Penn Center
                           1845 Market Street
                           Philadelphia, PA   19103
                           Attn:  Vincent A. Vietti, Esquire

                  (b)      If to the Employee:

                           Mira LaCous
                           1567 Antler Point
                           Eagan, MN  55122

The parties agree to give notice of any change of address within 15 days of the
change of address.

     16. Construction of Agreement.

          (a) Severability. In the event that any one or more of the provisions
of this Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

          (b) Headings. The descriptive headings of the several paragraphs of
this Agreement are inserted for convenience of reference only and shall not
constitute a part of this Agreement.

     17. Entire Agreement and Amendments. This Agreement, including all Exhibits
which shall form parts hereof, contains the entire agreement of the parties
concerning the Employee's employment and all promises, representations,
understandings, arrangements and prior agreements on such subject are merged
herein and superseded hereby. The provisions of this Agreement may not be
amended, modified, repealed, waived, extended or discharged except by an
agreement in writing signed by the party against whom enforcement of any
amendment,

<PAGE>

modification, repeal, waiver, extension or discharge is sought. No person acting
other than pursuant to a resolution of the Board of Directors shall have
authority on behalf of the Company to agree to amend, modify, repeal, waive,
extend or discharge any provision of this Agreement or anything in reference
thereto or to exercise any of the Company's rights to terminate or to fail to
extend this Agreement.

     18. Survival. The Employee's obligations under Paragraphs 5, 7, 8 and 9
shall survive and continue pursuant to the terms and conditions of this
Agreement following specific termination.

     19. Understanding. The Employee represents and agrees that she fully
understands her rights to discuss all aspects of this Agreement with her private
attorney, that to the extent she desires, she availed himself of this right,
that she has carefully read and fully understands all of the provisions of this
Agreement, that she is competent to execute this Agreement, that her decision to
execute this Agreement has not been obtained by any duress and that she freely
and voluntarily enters into this Agreement, and that she has read this document
in its entirety and fully understands the meaning, intent, and consequences of
this Agreement.

     20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.

     21. Injunctive Relief. The Employee hereby agrees and acknowledges that in
the event of a breach or anticipatory breach of this Agreement by the Employee,
the Company may suffer irreparable harm and monetary damages alone would not
adequately compensate the Company. Accordingly, the Company will therefore be
entitled to injunctive relief to enforce this Agreement.

<PAGE>

     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and attested by its duly authorized officers, and the Employee has set her hand,
all as of the day and year first above written.

ATTEST:                                         SAC TECHNOLOGIES, INC.

__________________________                      By:_____________________________

                                                   Name:________________________

                                                   Title:_______________________

WITNESS:                                        EMPLOYEE

__________________________                      ________________________________
                                                Mira LaCous

                                                ________________________________
                                                Date

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