Document:

Exhibit 10.1

May 8, 2007

VIA
HAND DELIVERY

Timothy K. Montgomery

Ditech Networks, Inc.

825 East Middlefield Road

Mountain View, CA  94043

Re:                     Transition
and Retirement Agreement

Dear Tim:

This letter sets forth
the terms of the transition and retirement agreement (the “Agreement”) between
you and Ditech Networks, Inc.(the “Company”).

1.                                      Retirement
Date.  Effective as of the date that
the Company’s Board of Directors (the “Board”) appoints a new Chief Executive
Officer and President (the “Retirement Date”), you hereby resign your
employment and positions as Chairman of the Board, Chief Executive Officer and
President of the Company and, unless otherwise provided herein, you also hereby
resign from any other office, title or position you may hold with the Company
or its subsidiaries, and the Company hereby accepts such resignations.  The Retirement Date will be your last day of
employment with the Company.  Of course,
the Company can accelerate the Retirement Date in the event that you materially
breach this Agreement, the Proprietary Information Agreement (defined in Section 8),
or any written Company policy.  Between
now and the Retirement Date, you will be employed with the Company for a
transition period (the “Transition Period”) which will be subject to the
following terms and conditions:

(a)                                  Transition
Duties; Vacation Schedule.  You shall
continue to be employed by the Company in the positions of Chief Executive
Officer and President, subject to all of the standard policies and procedures
of the Company.  You shall continue to
report to the Board and will:  (i) discharge
and perform any and all duties requested of you by the Board; (ii) take
all steps satisfactory to the Board to ensure the orderly transition of all
matters that you have handled during the course of your employment with the
Company; and (iii) provide transition briefing information to the Board as
it may request.  In addition, you shall
remain Chairman of the Board until the earlier of (x) your resignation as
Chairman of the Board, and (y) such time as the Board shall, in its sole
discretion, remove you as Chairman of the Board.  As discussed, you are approved to take a two (2) week
paid vacation this summer , and you have the option to take up to two (2) weeks
of unpaid vacation during the month of August.

	
  Ditech Networks

  	
   

  	
  +1 650 623 1300 phone

  	
  www.ditechnetworks.com

  
	
  825 East
  Middlefield Road

  	
   

  	
  +1 650 564 9599 fax

  	
   

  
	
  Mountain View,
  CA 94043-4025 USA

  	
   

  	
   

  	
   

  

 

 

(b)                                  Salary
Continuation and General Employee Benefits. 
During the Transition Period, you will continue to receive your current
base salary of $31,250 per month, paid in the Company’s ordinary payroll cycle
and subject to standard deduction and withholdings.  You will also continue to be eligible for the
Company’s standard employment benefits pursuant to the terms, conditions and
limitations of the benefit plans.

(c)                                  Vesting
of Option Grants.  To the extent
consistent with the terms of the option grants provided to you in connection
with your employment (the “Option Grants”) and the Company’s applicable equity
incentive plan(s) (the “Equity Plans”), your Option Grants will continue to
vest during the Transition Period, and thereafter if you shall continue to
perform “Continuous Service” or continue to have “Continuous Status” as those
terms are defined in the applicable Equity Plans, in accordance with terms of
the operative agreements and the Equity Plans. 
You and the Company agree that, effective as of the later of your
Retirement Date and the date that you shall cease to be a member of the Board
(or such later date, if any, that you cease to be a consultant to the Company,
the status of which would qualify you to maintain the status of “Continuous
Service” or “Continuous Status,” as applicable, under the Equity Plans,
pursuant to a written consulting agreement entered into with the Company on or
prior to the later of the Retirement Date and the date that you cease to be a
member of the Board), your service to the Company (for the purposes of the
Option Awards and the Equity Plans) will cease, and no additional shares
subject to the Option Grants will vest except to the extent set forth in Section 4(c).

2.                                      Accrued
Salary and Paid Time Off.  On the
Retirement Date, the Company will pay you all accrued salary, and all accrued
and unused paid time off earned through the Retirement Date, subject to
standard payroll deductions and withholdings. 
You are entitled to these payments by law.

3.                                      Board
Position.  You agree to immediately
tender your resignation as a Director on the Board, if such resignation is
requested by a majority of the Board on or after the Retirement Date.

4.                                      Severance
Benefits.  You acknowledge that, due
to the circumstances of your departure from the Company, that you are not
eligible for any severance benefits under the terms of your letter employment
agreement with the Company, dated September 15, 1998 (together with all
attachments thereto, including the Side Letter of equal date, the “Employment
Agreement”).  Nonetheless, if you enter
into this Agreement, comply with your obligations hereunder (including, but not
limited to, resigning from the Board if requested by a majority of the Board on
or after the Retirement Date as provided in Section 3 hereof), and, on or
timely after the Retirement Date, you sign, date, return to the Company and
allow to become effective the Retirement Date Release attached hereto as Exhibit A, the Company
hereby agrees to provide you the following as your sole severance benefits (the
“Severance Benefits”):

(a)                                  Severance Payments.  The
Company will provide severance pay in the form of continuation of your base
salary in effect as of the Retirement Date, for twelve (12) months (the “Severance
Payments”).  The Severance Payments will
be subject to required deductions and withholdings, and will be paid on the
Company’s normal payroll schedule, beginning with the first regular payroll
date following  the Effective Date of the
Retirement Date 

Release (as defined on Exhibit A hereto). 
The Severance Payments will not include any amount for bonus or
incentive compensation.

(b)                                  Health Insurance Coverage.  To
the extent provided by the federal COBRA law or, if applicable, state insurance
laws (“COBRA”), and by the Company’s current group health insurance policies, you
will be eligible to continue your group health insurance benefits at your own
expense following the Retirement Date. 
Later, you may be able to convert to an individual policy through the
provider of the Company’s health insurance, if you wish.  On or after the Retirement Date, you will be
provided with a separate notice describing your rights and obligations under
the applicable state and/or federal insurance laws.  If you timely elect such continued health
insurance coverage, the Company, as part of this Agreement and as an additional
severance benefit, will reimburse your documented health insurance premiums
sufficient to continue your group health insurance coverage at the same level
in effect as of the Retirement Date (including dependent coverage, if any), to
the extent such coverage remains available, for twelve (12) months after the
Retirement Date or through the date that you become eligible for group health
insurance benefits through a new employer, whichever is earlier.  You must provide prompt written notice to the
Chairman of the Compensation Committee if you become eligible for group health
insurance benefits through a new employer within twelve (12) months after the
Retirement Date.

(c)                                  Amendment of Option Grants.  You
and the Company hereby amend your Option Grants (the “Option Amendments”) to
provide:  (i) that the term during
which you may exercise any vested shares subject to the Option Grants is
extended up to (but no later than) the earlier to occur of (x) the later to
occur of December 31, 2008 and the date you cease to be a member of the
Board, and (y) the applicable term of such Option Grants; and (ii) that
your Option Grants will continue to vest on the same monthly vesting schedules
in effect as of the Retirement Date, until the earlier to occur of the date the
Option Grants cease to be exerciseable and seventeen (17) months after the
Retirement Date (to the extent not fully vested) and vesting will cease on such
date, provided that, all such vesting will
cease earlier in the event that you materially breach this Agreement or the
Proprietary Information Agreement at any time. 
As a result of the Option Amendments, if the Option Grants are incentive
stock options, the Option Grants will lose possibly favorable incentive stock
option treatment, and the Option Grants will be taxed as a nonstatutory stock
option upon exercise.  Accordingly, as a
condition to your exercise of any such vested shares, you hereby agree to
arrange for the payment of all applicable federal and state income and employment
taxes that the Company is required to withhold as a result of such exercise,
and no shares of the Company’s common stock will be issued to you in respect of
your exercise of the Option Grants unless and until you satisfy such tax
withholding obligations.  You hereby
acknowledge that the Company is not providing tax advice to you and that you
have been advised by the Company to seek independent tax advice with respect to
the exercise and modification of the Option Grants and any other compensation and
benefits that you are receiving under this Agreement.

(d)                                  Application of Section 409A
of the Internal Revenue Code.  In the event that the Company determines that
any payments or benefits provided hereunder (including but not limited to
payments or benefits pursuant to this Section 4), fail to satisfy the
distribution requirement of Section 409A(a)(2)(A) of the Internal
Revenue Code of 1986, as amended (the “Code”) as a result of Section 409A(a)(2)(B)(i) of
the Code, then such payments or benefits shall 

not be made pursuant to
the schedules provided herein and instead the payments or benefits shall be
accelerated, delayed or otherwise restructured, as determined by the Company,
to the minimum extent necessary so that such payments or benefits are not subject
to the provisions of Section 409A(a)(1) of the Code.  The Company may attach conditions to or
adjust the amounts paid pursuant to this Section 4(d) to preserve, as
closely as possible, the economic consequences that would have applied in the
absence of this Section 4(d); provided, however,
that no such condition or adjustment shall result in the payments or benefits
being subject to Section 409A(a)(1) of the Code.

(e)                                  Forfeiture of Severance Benefits. 
The Company’s obligation to provide the Severance Benefits,
or to continue to provide Severance Benefits, will cease in full immediately in
the event that, at any time, you materially breach this Agreement or the
Proprietary Information Agreement.  By
way of example, but not limitation, if you solicit any Company employees in
violation of Section 9 hereof, the Company will not provide any Severance
Benefits (or continue to provide the Severance Benefits).

5.                                      Other
Compensation or Benefits.  You
acknowledge that, except as provided in this Agreement, you have not earned and
will not receive any compensation, including without limitation salary, bonus,
incentive compensation, or severance, or any benefits before or after the
Retirement Date, with the exception of any vested right you may have under the
express terms of a written ERISA-qualified benefit plan (e.g., 401(k) account)
or any vested shares subject to the Option Grants.  By way of example, but not limitation, you
hereby represent and warrant that you have not earned and are not owed any
bonus compensation that has not already been paid to you.  The foregoing notwithstanding, you shall be
entitled to a bonus under the Company’s 2007 management bonus plan in an amount
to be determined by the Compensation Committee of the Board of Directors in its
sole discretion.

6.                                      Expense
Reimbursements.  You agree that, on
or before the Retirement Date, you will submit your final documented expense
reimbursement statement reflecting all business expenses you incurred through
the Retirement Date, if any, for which you seek reimbursement.  The Company will reimburse you for these
expenses pursuant to its regular business practice.

7.                                      Return
of Company Property.  On the
Retirement Date, or earlier if requested by the Board, you shall return to the
Company all Company documents (and all copies thereof) and other Company
property that you have in your possession or control (excluding any documents
or materials provided to you in your position as a Director on the Board),
including, but not limited to, operational and financial information and
reports, sales reports, sales and marketing information, client information,
Company products, samples, equipment, files, notes, correspondence, memoranda,
email, computer-recorded information, electronic information, drawings, records,
compilations of data, plans, forecasts, research and development information,
personnel information, product and manufacturing information, specifications,
tangible property (including, but not limited to, computers, PDAs, and cellular
phones), credit cards, entry cards, identification badges and keys; and any
materials of any kind that contain or embody any proprietary or confidential
information of the Company (and all reproductions thereof in whole or in
part).  You agree that you will make a
diligent search to locate any such documents, property and information on the
Retirement Date.  In addition, if you
have used any personally owned computer, server, or e-mail system to receive,
store, review, prepare or transmit any 

Company confidential or
proprietary data, materials or information, then on or before the Retirement
Date you shall provide the Company with a computer-useable copy of such
information and then permanently delete and expunge such Company confidential
or proprietary information from those systems without retaining any copy or
reproduction; and you shall provide the Company access to your system as
requested to verify that the necessary copying and/or deletion is done.  Your timely
compliance with the terms of this paragraph will be a condition of your receipt
of the Severance Benefits.

8.                                      Proprietary
Information Obligations.  You hereby
acknowledge and reaffirm your continuing obligations under your Proprietary and
Confidential Information and Inventions Agreement (the “Proprietary Information
Agreement”), a copy of which is attached hereto as Exhibit B.

9.                                      Nonsolicitation
of Employees.  During the Transition
Period and for one (1) year after the Retirement Date, you will not,
directly or indirectly, induce, encourage, solicit, recruit, attempt to solicit
or cause to be solicited or recruited, any employee or contractor of the
Company (or any subsidiaries or affiliates) to leave his or her employment,
terminate his or her work, or refrain from providing services to the Company,
or any of its subsidiaries or affiliates.

10.                               Disclosure.  You hereby acknowledge and agree that this
Agreement and a description of the terms set forth herein will be filed by the
Company with the Securities and Exchange Commission due to the Company’s
obligations as a reporting company under the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder, and
consequently shall be publicly available once filed.

11.                               Nondisparagement.  You agree not to disparage the Company or the
Company’s current and former officers, directors, employees, shareholders,
parents, subsidiaries, affiliates, and agents, in any manner likely to be
harmful to them or their business, business reputation or personal reputation;
and the Company (through its officers and directors) agrees not to disparage
you in any manner likely to be harmful to you or your business or personal
reputation; provided that the
parties may respond accurately and fully to any request for information if
required by legal process.

12.                               Cooperation.  You agree to cooperate fully with the Company
in connection with its actual or contemplated defense, prosecution, or
investigation of any claims or demands by or against third parties, or other
matters arising from events, acts, or failures to act that occurred during the
period of your employment by the Company. 
Such cooperation includes, without limitation, making yourself available
to the Company upon reasonable notice, without subpoena, to provide complete,
truthful and accurate information in witness interviews, depositions and trial
testimony.  The Company will reimburse
you for reasonable out-of-pocket expenses you incur in connection with any such
cooperation (excluding forgone wages, salary, or other compensation) and will
make reasonable efforts to accommodate your scheduling needs.  In addition, you agree to execute all
documents (if any) necessary to carry out the terms of this Agreement.

 

13.                               No
Admissions.  The promises and
payments in consideration of this Agreement shall not be construed to be an
admission of any liability or obligation by either party to the other party,
and neither party makes any such admission.

14.                               No Voluntary Adverse Action.  You agree that you will not voluntarily
assist any person in preparing, bringing, or pursuing any litigation,
arbitration, administrative claim or other formal proceeding against the
Company, its parents, subsidiaries, affiliates, officers, directors, employees
or agents, unless pursuant to subpoena or other compulsion of law.

15.                               Release
of Claims.  In exchange for
consideration provided to you by this Agreement that you are not otherwise
entitled to receive, you hereby generally and completely release the Company
and its current and former directors, officers, employees, shareholders,
partners, agents, attorneys, predecessors, successors, parent and subsidiary
entities, insurers, affiliates, and assigns from any and all claims,
liabilities and obligations, both known and unknown, that arise out of or are
in any way related to events, acts, conduct, or omissions occurring prior to or
on the date that you sign this Agreement. 
This general release includes, but is not limited to:  (a) all claims arising out of or in any
way related to your employment with the Company, or the termination of that
employment; (b) all claims related to your compensation or benefits from
the Company, including salary, bonuses, commissions, vacation pay, expense
reimbursements, severance pay, fringe benefits, stock, stock options, or any
other ownership interests in the Company; (c) all claims for breach of
contract, wrongful termination, and breach of the implied covenant of good
faith and fair dealing (including but not limited to claims arising from or
based on the Employment Agreement); (d) all tort claims, including claims
for fraud, defamation, emotional distress, and discharge in violation of public
policy; and (e) all federal, state, and local statutory claims, including
claims for discrimination, harassment, retaliation, attorneys’ fees, or other
claims arising under the federal Civil Rights Act of 1964 (as amended), the
federal Americans with Disabilities Act of 1990, the federal Age Discrimination
in Employment Act (as amended) (“ADEA”), the California Labor Code (as
amended), and the California Fair Employment and Housing Act (as amended).  You represent that you have no lawsuits,
claims or actions pending in your name, or on behalf of any other person or
entity, against the Company or any other person or entity subject to the
release granted in this paragraph.  Notwithstanding the foregoing, you are not
hereby releasing the Company from any obligation undertaken in this Agreement;
or any obligation the Company may otherwise have to indemnify you for your acts
within the course and scope of your employment with the Company, pursuant to
the articles and bylaws of the Company, any fully executed written agreement
with the Company, or applicable law.

16.                               ADEA Waiver.  You hereby acknowledge that you are knowingly
and voluntarily waiving and releasing any rights you may have under the ADEA
and that the consideration given for the waiver and release in the preceding
paragraph is in addition to anything of value to which you were already
entitled.  You further acknowledge that
you have been advised by this writing, as required by the ADEA, that: (a) your
waiver and release do not apply to any rights or claims that may arise after
the date that you sign this Agreement; (b) you should consult with an
attorney prior to signing this Agreement (although you may decide voluntarily
not to do so); (c) you have twenty-one (21) days within which to consider
this Agreement  (although you may
choose voluntarily to sign this Agreement  earlier);
(d) you have seven (7) days following your signing of this Agreement  to revoke this Agreement (in a written 

revocation received by
the Chief Financial Officer of the Company); and (e) this Agreement will
not be effective until the eighth day after this Agreement has been signed both
by you and by a duly authorized officer of the Company, provided that you do
not revoke it (the “Effective Date”).

17.                               Section 1542
Waiver.  In giving the release
herein, which includes claims which may be unknown to you at present, you
acknowledge that you have read and understand Section 1542 of the California
Civil Code, which reads as follows:

“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.”

You hereby expressly
waive and relinquish all rights and benefits under that section and any
law of any other jurisdiction of similar effect, including but not limited to
your release of any unknown or unsuspected claims herein.

18.                               Dispute Resolution.  To aid in the rapid and economical resolution
of any disputes which may arise under this Agreement, you and the Company agree
that any and all claims, disputes or controversies of any nature whatsoever
arising from or regarding the interpretation, performance, negotiation,
execution, enforcement or breach of this Agreement, your employment
relationship, or the termination of your employment, will be resolved by
confidential, final and binding arbitration conducted before a single
arbitrator with JAMS, Inc. (“JAMS”) in San Francisco, California under
JAMS’ then-applicable arbitration rules. 
The parties  acknowledge
that by agreeing to this arbitration procedure, they waive the right to resolve
any such dispute through a trial by jury, judge or administrative proceeding.  You will have the right to be represented by
legal counsel at any arbitration proceeding. 
The arbitrator shall:  (a) have
the authority to compel adequate discovery for the resolution of the dispute
and to award such relief as would otherwise be available under applicable law
in a court proceeding; and (b) issue a written statement signed by the
arbitrator regarding the disposition of each claim and the relief, if any,
awarded as to each claim, the reasons for the award, and the arbitrator’s
essential findings and conclusions on which the award is based.  The Company shall bear the JAMS arbitration
fees and administrative costs.   Nothing in this Agreement shall prevent either
you or the Company from obtaining injunctive relief in court to prevent
irreparable harm pending the conclusion of any such arbitration.  The parties agree that the
arbitrator shall award reasonable attorneys fees and costs to the prevailing
party in any action brought hereunder, and the arbitrator shall have discretion
to determine the prevailing party in an arbitration where multiple claims may
be at issue.

19.                               General.  This Agreement, including Exhibits A and B, constitutes the complete, final and
exclusive embodiment of the entire agreement between you and the Company with
regard to the subject matter hereof.  It
is entered into without reliance on any promise or representation, written or
oral, other than those expressly contained herein, and it supersedes any other
such promises, warranties or representations, including but not limited to the
Employment Agreement.  This Agreement may
not be modified or amended except in a writing signed by both you and a duly
authorized member of the Board.  This
Agreement will bind the heirs, 

personal representatives,
successors and assigns of both you and the Company, and inure to the benefit of
both you and the Company, their heirs, successors and assigns.  If any provision of this Agreement is
determined to be invalid or unenforceable, in whole or in part, this
determination will not affect any other provision of this Agreement and the
provision in question shall be deemed modified so as to be rendered enforceable
consistent with the intent of the parties insofar as possible under applicable law.  This Agreement will be governed by the laws
of the State of California without regard to conflicts of law principles.  Any ambiguity in this Agreement shall not be construed against either
party as the drafter.  Any waiver of a
breach of this Agreement, or rights hereunder, shall be in writing in order to
be effective and shall not be deemed to be a waiver of any successive breach or
rights hereunder.  This Agreement may be
executed in counterparts which shall be deemed to be part of one original, and
facsimile signatures shall be equivalent to original signatures.

If this Agreement is
acceptable to you, please sign below and return the original to me within
twenty-one (21) days after your receipt of this Agreement.  The offer contained in this Agreement will
automatically expire if we do not receive the fully executed Agreement from you
by that date.  Do not sign the Retirement
Date Release attached as Exhibit A until the Retirement Date.

We look forward to
continuing to work with you during the Transition Period, and we wish you the
best in your future endeavors.

Sincerely,

DITECH NETWORKS, INC.

	
  By:

  	
  /s/ William J. Tamblyn

  	
   

  
	
   

  	
  William
  J. Tamblyn

  
	
   

  	
  Chief
  Financial Officer

  
	
   

  
	
   

  
	
   

  
	
  UNDERSTOOD AND AGREED:

  
	
   

  
	
   

  
	
  /s/ Timothy K. Montgomery

  	
   

  
	
  Timothy K. Montgomery

  
	
   

  
	
  May 8, 2007

  	
   

  
	
  Date

  

 

Attachments:

Exhibit A – 
Retirement Date Release

Exhibit B – Proprietary and Confidential
Information and Inventions Agreement

EXHIBIT A

RETIREMENT DATE RELEASE

(To be signed on or within twenty-one (21) days after the Retirement
Date.)

In exchange for the Severance Benefits and other consideration to be
provided to me by Ditech Networks, Inc. (the “Company”) pursuant to the transition
and retirement agreement between me and the Company dated May     ,
2007 (the “Agreement”), I hereby provide the following Retirement Date Release
(the “Release”).

I hereby generally
and completely release the Company, its parent, and its and their directors,
officers, employees, shareholders, partners, agents, attorneys, predecessors,
successors, parent and subsidiary entities, insurers, affiliates, and assigns
from any and all claims, liabilities and obligations, both known and unknown,
arising out of or in any way related to events, acts, conduct, or omissions
occurring at any time prior to or on the date that I sign this Release.  This general release includes, but is not
limited to: (1) all claims arising out of or in any way related to my employment
with the Company or the termination of that employment; (2) all claims related
to my compensation or benefits from the Company, including salary, bonuses,
commissions, vacation pay, expense reimbursements, severance pay, fringe
benefits, stock, stock options, or any other ownership or equity interests in
the Company; (3) all claims for breach of contract, wrongful termination,
and breach of the implied covenant of good faith and fair dealing (including
but not limited to claims arising under or based on the Agreement or the
Employment Agreement); (4) all tort claims, including claims for fraud,
defamation, emotional distress, and discharge in violation of public policy;
and (5) all federal, state, and local statutory claims, including claims for discrimination,
harassment, retaliation, attorneys’ fees, or other claims arising under the
federal Civil Rights Act of 1964 (as amended), the federal Americans with
Disabilities Act of 1990, the federal Age Discrimination in Employment Act (as
amended) (“ADEA”), the California Labor Code (as amended), and the California
Fair Employment and Housing Act (as amended). 
Notwithstanding the foregoing, I am not releasing the Company hereby
from any obligation to indemnify me pursuant to any written agreement, the
Company’s articles or by-laws, or applicable law.  I represent that I have no lawsuits, claims
or actions pending in my name, or on behalf of any other person or entity,
against the Company or any other person or entity subject to the release
granted in this paragraph.

I acknowledge that I am knowingly and
voluntarily waiving and releasing any rights I may have under the ADEA, and
that the consideration given for the waiver and release in the preceding
paragraph is in addition to anything of value to which I am already
entitled.  I further acknowledge that I
have been advised by this writing that: 
(1) my waiver and release do not apply to any rights or claims that may
arise after the date I sign this Release; (2) I should consult with an attorney
prior to signing this Release (although I may choose voluntarily not to do so);
(3) I have twenty-one (21) days to consider this Release (although I may choose
voluntarily to sign it earlier); (4) I have seven (7) days following the date I
sign this Release to revoke it by providing written notice of revocation to the
Chief Financial Officer of the Company; and (5) this Release will not be
effective until the date upon which the revocation period has expired, which
will be the eighth calendar day after the date I sign it, provided that I do
not revoke it (the “Effective Date of the Retirement Date Release”).

I UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND
UNKNOWN CLAIMS.  I acknowledge that I
have read and understand Section

1542 of the
California Civil Code which reads as follows: 
“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.”  I hereby expressly waive and relinquish all
rights and benefits under that section and any law or legal principle of
similar effect in any jurisdiction with respect to my release of claims herein,
including but not limited to the release of unknown and unsuspected claims.

I
hereby represent that I have been paid all compensation owed and for all hours
worked, I have received all the leave and leave benefits and protections for
which I am eligible, pursuant to the federal Family and Medical Leave Act, the
California Family Rights Act, or otherwise, and I have not suffered any
on-the-job injury for which I have not already filed a workers’ compensation
claim.

	
  

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Timothy
  K. Montgomery

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date:

  	
   

  
					

 

EXHIBIT B

PROPRIETARY AND CONFIDENTIAL INFORMATION AND INVENTIONS

AGREEMENTExhibit
10.1

EMPLOYMENT AGREEMENT

This Employment Agreement (“Agreement”) is made and
entered into as of April 16, 2007, by and between MGP Ingredients, Inc., its
subsidiaries and other affiliates (hereinafter referred to collectively as the
“Company”), and Dr. Sukh Bassi (the “Employee”).

WHEREAS, the Company desires to employ the Employee in
the capacity of Vice President Scientific Affairs, Chief Science Officer, and
the Employee desires to be employed by the Company in such capacity and on the
terms and conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the mutual
covenants of the parties herein made, it is hereby agreed:

1.             Term of Agreement.  The term of this Agreement shall commence on
the date hereof and end on June 30, 2010, unless sooner terminated as provided
in Paragraph 9 of this Agreement; provided, however, that the Company may elect
to renew this Agreement for an additional term of one (1) year at the end of
the initial term by serving notice on Employee at least thirty (30) days prior
to the expiration of the initial term, in accordance with the procedures set
out in Paragraph 15 of this Agreement, that 
the Company intends to extend the Agreement for such additional term of
one year.   The Company shall not be
required to show Cause for not extending the Agreement under the terms of this
Paragraph, and in case of expiration of this Agreement after the initial term,
the Company’s obligation to pay Base Salary and Bonus Compensation, if any,  or to provide Employee Benefits under this
Agreement as defined in Paragraph 3 below, shall cease upon the expiration date
of this Agreement.  The Employee’s rights
to other compensation and benefits, if any, shall be determined under the Company’s
benefit plans and policies applicable to Employee then in effect.

2.                                       Employment
and Duties.  The Company hereby
agrees to employ the Employee, and the Employee hereby accepts employment, in
the capacity above stated to perform such duties and responsibilities as are,
from time to time, assigned to the Employee by the Company President, which may
include, without limitation,  such duties
and responsibilities as procuring, processing and administering grants,
handling external and international science and government issues,  collaborating with industry and universities,
representing the Company in its relationships with the IWGA, IFT, American
Bakers Assn., American Society of Baking, and the Bio-Polymer Institute,
representing the Company before the Kansas Bio Authority and USDA, serving as the
Washington D.C. contact with the Kansas Congressional delegation and
serving  as the Company contact for the
National Assn. of Wheat Growers. Employee also shall attend internal Company
meetings at the request of the Company President.  The Employee agrees to devote full business
time and effort to the diligent and faithful performance of the Employee’s
duties under the direction of the Company’s President.  Employee’s principal place of employment
shall be moved to the Company’s new corporate office located in Atchison,
Kansas.

3.                                       Compensation
and Benefits.

(a)                                  Base
Salary.  As compensation for the
Employee’s services, the Employee shall be paid an annual base salary of Two
Hundred Four Thousand Eight Hundred Dollars

 1
 

($204,800) payable in
regular payroll installments, less applicable withholdings (the “Base
Salary”).  Employee’s base salary will be
reviewed annually.

(b)                                 Bonus
Compensation.  The Employee shall, in
addition to the Base Salary, be eligible to participate in a bonus program or
plan structured on external science issues as from time to time may be adopted
by the Company and in effect, if any. 
The existence and terms of any such program or plan shall be determined
solely at the discretion of the Company and participation is subject to the terms
and conditions of any such program or plan.

(c)                                  Employee
Benefits.  The Employee shall be
entitled to participate in the Company’s health, life, vacation, retirement and
disability plans (“Employee Benefits”) in accordance with their respective
terms.  Nothing herein shall be construed
to limit the Company’s discretion to amend, terminate or otherwise modify any
such Employee Benefits.

(d)                                 Restricted
Stock Grants.  The Employee will be
entitled to receive outstanding restricted stock awards in accordance with
their terms.

(e)                                  Business
Expenses.  The Company shall
reimburse the Employee for entertainment and travel expenses related to the
Company’s business in accordance with the policies of the Company applicable to
the Employee on the date of this Agreement, subject to the right of the Company
to modify its general policies relating to expense reimbursement for employees.

4.                                       Confidential
Information

(a)                                  Definition

The term
“Confidential Information” as used in this Agreement means (i) any and all
information concerning the business and affairs of the Company or of  persons which whom the Company does business,
such as customers, suppliers, licensors 
and licensees (“Business Contacts”) which is not known by or generally
available to the public in any form whatsoever that is disclosed in any manner
by Company or a Business Contact to Employee or otherwise becomes known to
Employee during or prior to the term of this Agreement, including without
limitation information about products, product formulas and development, raw
materials, packaging, manufacturing processes and methods, patents, patent
applications, financial information, business plans and strategies, inventory
techniques, pricing information, and customer and supplier lists and contact
information, as well as reports, analyses, compilations, data, forecasts,
studies and other materials which contain or otherwise reflect or are generated
or derived from that information, and (ii) any and all information of  a Business Contact which is designated as confidential
information pursuant to an agreement between the Business Contact and the
Company.    Confidential Information also
includes (a) any information of Company 
in tangible or electronic form that is clearly and conspicuously marked,
as practicable, as confidential, and (b) any orally disclosed information of
Company that is designated confidential when disclosed, is reduced to writing
within thirty days of disclosure, and is clearly and conspicuously marked as
confidential.  In the latter case, the disclosure
is Confidential Information until the thirty days have passed.

 2
 

(b)                                 Exceptions

Notwithstanding
the foregoing, the Parties agree that the term “Confidential Information” will
not include any information of the Company’s which is in the public domain
prior to receipt by Employee or subsequent to the date of receipt without
breach of this Agreement by Employee.

(c)                                  Protection
of Confidential Information

All Confidential
Information previously supplied or known to Employee or which is supplied or
becomes known to him pursuant to this Agreement will be maintained by him in
confidence.  Employee will use a high
degree of care and take all reasonable steps necessary to maintain the
confidentiality of Confidential Information. Employee will not disclose Confidential
Information to any third party unless either (i) he has been authorized to do
so in writing by the President of the 
Company or (ii) he is required to do so in the performance of his duties
for the Company under this Agreement and (a) he has informed the third party
that the Confidential Information to be disclosed is Confidential Information
of the Company and (b) he has obtained from the third party a written
confidentiality agreement either in a form then currently used by the Company
or in a form approved for use in the particular instance by the President or
counsel for the Company.   If Employee is
required to disclose any of Company’s Confidential Information pursuant to a
subpoena or similar judicial or governmental order, Employee will inform
Company as soon as reasonably possible of the order and its requirements so
that Company will have a reasonable opportunity to appear as necessary and
contest the order.  Company is not
obligated to supply any Confidential Information to Employee under this
Agreement, makes no representation or warranty about the accuracy or
completeness of any Confidential Information supplied to Employee under this
Agreement, and has no obligation to update or correct inaccuracies which are or
may become apparent in any Confidential Information.

(d)                                 Ownership

Company is the sole owner
of Confidential Information.  Upon
request by Company, Employee agrees to return to Company, or to destroy and
certify that he has destroyed, all Confidential Information provided by Company.  Unauthorized disclosure of Confidential
Information by Employee could result in irreparable harm to Company, and
entitle Company to seek injunctive and/or other appropriate relief.  Nothing in this Agreement will be deemed to
grant to Employee a license directly or by implication, estoppel, or otherwise
under any patent, patent application, trade secret or other intellectual
property right, title or interest related to any Confidential Information
disclosed pursuant to this Agreement.

5.                                       Perfection
of IP Rights

Company owns all right, title and interest in
patents and patent applications based on inventions made in whole or in part at
any time by Employee in the course of his employment by  Company, and it is anticipated that Employee
may continue to make inventions for Company in his work for Company under this
Agreement.  Employee will cooperate fully
with Company and its patent counsel in preparing, filing and prosecuting
Company patent applications based in

 3
 

whole or in part on
inventions made by Employee, the following being examples of that
cooperation.  With respect to preparing
patent applications, Employee will provide Company and counsel with all
information in his possession, custody or control that relates to his
invention, will work with counsel to draft sound patent applications, and will
read successive drafts, paying particular attention to the final draft.  With respect to filing applications, Employee
will sign a declaration of inventorship, an assignment to the Company of all
right, title and interest in the application, and any other documents presented
by counsel.  With respect to prosecution
of the application, Employee will review and comment on Office Actions and
related prior art, will sign further declarations of inventorship if necessary
(for continuation-in-part applications, among others), and will participate in
determinations relating to Patent Cooperation Treaty applications and the
countries in which Company should go national. 
To the extent that Company seeks to register or otherwise enhance
protection of some non-patent aspect of its intellectual property that Employee
helped create, Employee will participate fully in the processes required by
law.  In that context, each registrable
copyright will be considered a work made for hire (including software) and
the  work and registration of the work
will be owned by Company.

6.    Covenant
Not to Compete.

During the Employee’s employment with the
Company and for a period of two (2) years after the expiration or termination
of this Agreement or of the Employee’s employment with the Company for any
reason, the Employee agrees not to act as an owner, part owner, shareholder,
joint venturer or operator, officer or director, employee, consultant or agent
of any other person, firm, corporation, partnership, joint venture or other
entity which is engaged in the development, manufacturer, and/or sale of any
product that is substantially equivalent to any product made by the Company
during the term of this Agreement. The foregoing provisions shall not prohibit
the Employee from investing in any securities of any corporation whose
securities are listed on a national securities exchange or traded in the
over-the-counter market if the Employee shall own less than one percent (1%) of
the outstanding voting stock of such corporation. The Employee agrees that a
breach of the covenants contained herein and in paragraphs 4, 5, 7 and 8 will
result in irreparable and continuing damage to the Company for which there will
be no adequate remedy at law, and in the event of any breach of such agreement,
the Company shall be entitled to injunctive and such other and further relief
as may be proper, including damages, attorneys’ fees, and litigation costs.

7.                                       Solicitation
and Interference Prohibition.

During the Employee’s employment with the
Company and for a period of two (2) years after the expiration or termination
of this Agreement or of the Employee’s employment with the Company for any
reason, the Employee shall not directly or indirectly, whether as an
individual, or on behalf of any other person, firm, corporation, partnership,
joint venture or entity whatsoever, solicit or endeavor to entice away from the
Company any employee who is employed by the Company.  Additionally, during the Employee’s employment
with the Company or for a period of two (2) years after the expiration or
termination of this Agreement or of Employee’s employment with the Company for
any reason, the Employee shall not, directly or indirectly through any other
individual or entity, solicit the business of any customer of the Company, or
solicit, entice, persuade or induce any individual or entity to terminate,
reduce or refrain from forming, renewing or extending its relationship, whether
actual or prospective, with

 4
 

the Company. During
Employee’s employment and for a period of two (2) years thereafter, Employee
will not disrupt, damage, impair or interfere with the business of the Company
or any of its affiliates or subsidiaries whether by way of interfering with or
employing or seeking to employ its employees or by disrupting relationships
with customers, agents, representatives or vendors or any others that have a
business relationship with the Company.

8.                                       Disparagement
Prohibition.

The Employee acknowledges and agrees that as a result of his position
with the Company, disparaging or critical statements made by the Employee may
be uniquely detrimental to the Company’s interests and well-being.  Therefore, the Employee agrees to use his
best efforts to assist the Company in promoting and preserving the good will
and other business interests of the Company. 
To this end, the Employee agrees to refrain at all times, both during
the Employee’s employment and after the termination thereof for any reason,
from making disparaging comments, or any public statements or remarks about the
Company or its affiliates, subsidiaries, officers, employees or directors,
unless previously approved by the Company’s Board of Directors.

9.                                       Termination
and Severance.

(a)                                  Death
or Disability.  In the event of the
Employee’s death or if the Employee should become unable to perform the
essential functions of the Employee’s position with  reasonable accommodation by the Company for a
period of six (6) months (referred to as the “disability”), this Agreement, and
the Company’s obligation to make further Base Salary or Bonus Compensation
payments or provide Employee Benefits as defined in Paragraph 3 of this
Agreement, shall terminate.  The
Employee’s rights to other compensation and benefits, if any, shall be determined
under the Company’s benefit plans and policies applicable to Employee then in
effect.

(b)                                 Termination
for Cause by the Company.  By
following the procedure set forth in Paragraph 9(e), the Company shall have the
right to terminate this Agreement and the employment of the Employee for
“Cause.”  For purposes of this Agreement,
“Cause” is defined to mean, the Employee:

(i)                                     
engages in fraud, dishonesty, willful misconduct, willful mismanagement, or
gross negligence;

(ii)                                  is
convicted of, or pleads nolo contendre to, a crime involving moral turpitude;

(iii)                               violates
Paragraph 4 through 8; or

(iv)                              voluntarily
terminates employment without Good Reason (as defined below).

If the employment of the Employee is terminated by the
Company for Cause, this Agreement and the Company’s obligation to make further
Base Salary and Bonus Compensation payments, if any, and to provide Employee
Benefits as set forth in Paragraph 3 of this Agreement

 5
 

shall thereupon
immediately terminate.  The Employee’s
rights to other compensation and benefits, if any, shall be determined under
the Company’s benefit plans and policies applicable to the Employee then in
effect.

(c)                                  Termination
for Good Reason by the Employee.  By
following the procedure set forth in Paragraph 9(e), the Employee shall have
the right to terminate this Agreement and the Employee’s employment with the
Company for “Good Reason” in the following circumstances:

(i)                                     Change
of Location. The Company shall require Employee to permanently (for more
than three continuous months during any 12 month period) relocate from the
Atchison/Kansas City, Kansas vicinity; or

(ii)                                  Reduction
of Total Compensation Opportunity. 
The Company  reduces the
Employee’s Base Salary below the amount specified in Paragraph 3(a).

Any notification of the Employee’s intent to terminate
the Agreement for Good Reason under this Paragraph must be given, pursuant to
Paragraph 9(e), no later than thirty (30) days after the Employee learns, or
reasonably should become aware, of the occurrence of the event giving rise to
the right to terminate for Good Reason.

If the employment of the Employee is terminated by the
Employee for Good Reason (as defined above), the Company’s obligation to make
further Bonus Compensation payments, if any, or to provide Employee Benefits
under this Agreement shall cease on the effective date of such termination, but
the Employee will be entitled to receive Base Salary to the end of the term of
the Agreement then in effect.  The
payment shall be paid in accordance with the Company’s customary payroll
policies until the end of the term, unless otherwise agreed to by the Employee
and the Company at the time of termination, or unless prohibited under law,
rule or regulation.    The Employee’s rights
to other compensation and benefits, if any, shall be determined under the
Company’s benefit plans and policies applicable to the Employee then in effect.

(d)                                 Termination
by Company Without Cause or by Employee Without Good Reason.  The Company may terminate this Agreement and
the Employee’s employment without Cause at any time, and in such event the
Company’s obligation to make further Bonus Compensation payments, if any, and
to provide Employee Benefits under this Agreement shall cease on the effective
date of such termination, but the Employee shall be entitled to Base Salary to
the end of the term of the Agreement then in effect.  The payment of Base Salary shall be made  in accordance with the Company’s customary
payroll policies unless otherwise agreed by the Employee and the Company at the
time of termination, or unless prohibited under law, rule or regulation. The
Employee’s rights to other compensation and benefits, if any, shall be
determined under the Company’s benefit plans and policies applicable to the
Employee then in effect.

The Employee may voluntarily terminate this Agreement
and the Employee’s employment without Good Reason at any time, but in such
event the Employee shall not be entitled to any further Base Salary or Bonus
Compensation, if any, or to further Employee

 6
 

Benefits under this
Agreement.  The Employee’s rights to
other compensation and benefits, if any, shall be determined under the
Company’s benefit plans and policies applicable to the Employee then in effect.

(e)                                  Notice
of Termination.  The party proposing
to terminate this Agreement and the employment of the Employee for Cause or
Good Reason, as the case may be, under Paragraph 9(b) or 9(c) above shall give
written notice to the other, specifying the reason therefore with
particularity.  The effective date of
termination shall be the date on which notification of termination shall be
mailed in accordance with Paragraph 15 of this Agreement, unless a different
termination date shall be designated by the party giving notice or agreed upon
by the Employee and the Company.

(f)                                    Expiration
of Term of Agreement.  At the
expiration of the term of this Agreement as defined in Paragraph 1 above, if
the Agreement has not been previously terminated under Paragraph 9 of this
Agreement, all duties and obligations of the parties under this Agreement,
except those set out in Paragraphs 4 through 8, shall cease.

(g)                                 Survival
of Certain Provisions. 
Notwithstanding the expiration or termination of this Agreement, and the
Employee’s employment with the Company for any reason under this Agreement, the
provisions of Paragraphs 4 through 8 survive any such termination and shall be
binding upon the Employee and the Company in accordance with the provisions
of  such Sections.

10.                                 Litigation
Assistance.  Employee will cooperate
and assist the Company in the investigation, prosecution and resolution of any
pending or threatened legal action, arbitration or administrative proceeding or
investigation involving any matter that arose before or during Employee’s
employment by the Company, including, without limitation, preparation
activities, testifying as a witness and providing relevant information to the
Company.  Employee further agrees he will
not take any actions which would cause him to be subpoenaed in any
investigation, prosecution, or resolution of any pending or threatened legal
action, arbitration, or administrative or judicial proceeding and will not
testify in any such proceedings absent a valid subpoena or at the Company’s
request.

11.                                 Arbitration.  Except as otherwise provided in this Paragraph,
the parties hereby agree that any dispute arising under this Agreement or any
claim for breach or violation of any provision of this Agreement shall be
submitted to arbitration, pursuant to the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association (“AAA”), to a
single arbitrator selected by mutual agreement of the parties or, if the
parties do not mutually agree on the arbitrator, in accordance with the rules
of the AAA.  The award determination of
the arbitrator shall be final and binding upon the parties.  Either party shall have the right to bring an
action in any court of competent jurisdiction to enforce this Paragraph and to
enforce any arbitrator’s award rendered pursuant to this Paragraph.  The venue for all proceedings in arbitration
under this provision, and for any judicial proceedings related to the
arbitration, shall be in Kansas City, Missouri. 
Nothing in this Paragraph, however, shall prevent the Company from
seeking injunctive relief to preserve its rights under Paragraphs 4 through 8
of this Agreement.

 7
 

12.                                 Severability.  If any one or more of the provisions of this
Agreement shall be held invalid or unenforceable, the remaining provisions
shall remain valid and enforceable to the maximum extent permitted by law.

13.                                 Entire
Agreement.  This Agreement contains a
statement of all agreements and understandings between the Employee and the
Company on the subject matters covered by the Agreement, and it replaces and
supersedes all prior contracts and agreements between the Employee and the
Company concerning such matters.  No
additions or modifications to this Agreement will be effective unless made in
writing and signed by the Employee and the Company.

14.                                 Binding
Effect.  This Agreement shall be
binding upon and inure to the benefit of the personal representatives, heirs
and assigns of the Employee and to any successors in interest and assigns of
the Company.

15.           Notices.  All notices required or permitted to be given
hereunder shall be sent registered or certified mail, addressed to the
respective parties at their addresses set forth below:

To
the Employee:                                                                                                   Sukh
Bassi

1502 Hillcrest Court

Atchison, Kansas  66002

 

To
the Company:                                                                                                    MGP
Ingredients, Inc.

100 Commercial
Street

P.O. Box 130

Atchison, Kansas
66002-0130

 

or such other address as a party hereto may notify the
other in writing.

16.                                 Applicable
Law.  This Agreement, or any portion
thereof, shall be interpreted in accordance with the laws of the State of
Kansas.

17.                                 Assignment.  The rights and obligations of the Company
under this Agreement shall inure to the benefit of and shall be binding upon
the successors and assigns of the Company. 
Employee may not assign any of his rights or delegate any of his duties
or obligations under this Agreement without the Company’s express written
consent.

18.                                 Non-Waiver
Provision.  The failure of either
party of this Agreement to insist upon strict adherence to any term of this
Agreement, or to object to any failure to comply with any provision of this
Agreement, shall not (a) constitute or operate as a waiver of that term or
provision, (b) estop that party from enforcing that term or provision, or (c)
preclude that party from enforcing that term or provision or any other term or
provision.  The receipt of a party to
this Agreement of any benefit from this Agreement shall not effect a waiver or
estoppel of the right of that party to enforce any provision of this Agreement.

ALL SIGNATORIES ACKNOWLEDGE THEY HAVE CAREFULLY
READ THIS AGREEMENT, WERE PROVIDED AN OPPORTUNITY TO EXAMINE THE

 8
 

ARBITRATION
RULES AND CONSULT WITH COUNSEL BEFORE SIGNING, AND UNDERSTAND THAT BY SIGNING
THIS AGREEMENT, BOTH PARTIES WAIVE RIGHTS TO TRIAL BY COURT OR JURY, EXCEPT AS
EXPRESSLY PROVIDED HEREIN.

IN WITNESS WHEREOF, the parties have duly executed
this Agreement as of the day and year first written above.

	
  EMPLOYEE

  	
  MGP INGREDIENTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ Sukh Bassi

  	
   

  	
  By:

  	
  /s/ David E. Rindom

  	
   

  
	
   

  	
  Name: David E. Rindom

  
	
   

  	
  Title:

  	
  Vice President - Human Resources

  
						

 

 9

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