Document:

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                              EMPLOYMENT AGREEMENT

                                     BETWEEN

                          IMAGE PROCESSING SYSTEMS INC.

                                       AND

                                 KENNETH WAWREW

     THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into by
and between IMAGE PROCESSING SYSTEMS INC., a company incorporated under the
laws of the Province of Ontario (the "Company"), and KENNETH WAWREW
("Executive"), to be effective as of the Closing Date of the Acquisition
Agreement ("the Acquisition Agreement") among Photon Dynamics, Inc., the
Company and certain shareholders of the Company (the "Effective Date"). The
Company and Executive are hereinafter collectively referred to as the
"Parties," and may individually be referred to as a "Party."

                                    RECITALS

     A.   The Executive has been employed by the Company since October 2, 1995.

     B.   The Executive is a shareholder of the Company.

     C.   The shareholders of the Company have entered into an agreement ("the
Acquisition Agreement") pursuant to which Photon Dynamics, Inc. will become,
directly or indirectly, the controlling shareholder of the Company.

     D.   In order to induce Photon Dynamics, Inc. to consummate the Acquisition
Agreement, the Executive has agreed to continue his employment with the Company
on the terms and conditions hereinafter set out.

                                    AGREEMENT

     In consideration of the foregoing premises and the mutual covenants herein
contained, and for other good and valuable consideration, the Parties, intending
to be legally bound, agree as follows:

     1.   This Agreement shall become effective on the date of closing of the
Acquisition Agreement. In the event that the Acquisition Agreement is not
completed, this Agreement shall be null and void.

     2.   EMPLOYMENT.

          2.1   The Company hereby agrees to continue to employ Executive, and
Executive hereby agrees to continue his employment by the Company, upon the
terms and conditions set forth in this Agreement.

                                       1.
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          2.2   Executive shall have the title President, Image Processing
Systems and Vice President, Photon Dynamics, IPS Operations, and shall serve in
such other capacity or capacities as the Board of Directors of the Company (the
"Board") may from time to time prescribe. Executive shall report to the Chief
Executive Officer of Photon Dynamics, Inc. and the Company.

          2.3   Executive shall fulfill the normal responsibilities, duties and
authorities associated with the position of President. Executive shall
participate as a member of the management team in the formulation of the
Company's annual plan and strategic objectives; provided, however, that at all
times during his employment Executive shall be subject to the direction and
policies established by the Board.

          2.4   Unless the Parties otherwise agree in writing, Executive shall
perform the services which he is required to perform pursuant to this Agreement
at the Company's premises in Markham Ontario, provided, however, that the
Company may from time to time require Executive to travel temporarily to other
locations in connection with the Company's business.

     3.   LOYAL AND CONSCIENTIOUS PERFORMANCE.

          3.1   During his employment by the Company, Executive shall devote his
full energies, interest, abilities and productive time to the proper and
efficient performance of his duties under this Agreement. The foregoing shall
not preclude Executive from engaging in civic, charitable or religious
activities which will not present any direct conflict of interest with the
Company or affect the performance of Executive's duties hereunder.

          3.2   During his employment by the Company, Executive shall not
engage, either directly or indirectly, on his own behalf or on behalf of any
third party, in any manner or capacity, as adviser, principal, agent, partner,
officer, director, employee, member of any association or otherwise, in any
phase of the business of developing, manufacturing or marketing of products
which are in the same field of use or which otherwise directly compete with the
products or proposed products of the Company.

          3.3   Ownership by Executive, as a passive investment, of less than
one percent (1%) of the outstanding shares of capital stock of any corporation
with one or more classes of its capital stock listed on a national securities
exchange or publicly traded in the over-the-counter market shall not constitute
a breach of this Section 3.

     4.   COMPENSATION OF EXECUTIVE.

          4.1   The Company shall pay Executive a base salary of Two Hundred
and Seventy Thousand Dollars ($270,000) per year ("Base Salary"), payable in
regular periodic payments in accordance with Company policy. Such salary shall
be prorated for any partial year of employment on the basis of a 365-day fiscal
year. Executive's Base Salary shall be subject to annual review and thereafter
Executive shall be entitled to such increase in Base Salary as the Board may
determine from time to time.

          4.2   Executive shall be eligible to receive a target incentive bonus
of 35% of his annual Base Salary with respect to each complete Fiscal year of
employment hereunder in

                                       2.
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accordance with a formula to be determined annually by the Board in consultation
with the Executive. Any bonus entitlement shall be paid to Executive within 30
days of the receipt by the Company of its audited financial statements for the
relevant fiscal year.

          4.3   Executive shall, in the discretion of the Board and in
accordance with Company policy, be entitled to participate in benefits under any
employee benefit plan or arrangement made available by the Company now or in the
future to its executives and key management employees, including four weeks of
vacation with pay.

          4.4   The Company shall within ninety days of the Effective Date cause
to be granted to the Executive options to purchase Seventy Thousand Three
Hundred and Sixteen (70,316) shares of the Common Stock of Photon Dynamics, Inc.
("the Options") in accordance with the terms of Photon Dynamics, Inc.'s Amended
and Restated 1995 Stock Option Plan ("the Plan").

          4.5   Executive shall be entitled to receive reimbursement of all
reasonable travel and other business expenses incurred by Executive in
performing Company services, including expenses related to travel, parking and
business meetings. Such expenses shall be accounted for in accordance with the
policies and procedures established by the Company.

          4.6   Executive shall be entitled to a car allowance of $600.00 per
month.

          4.7   All of Executive's compensation shall be subject to withholding
with respect to income taxes and any other amounts required by law.

     5.   TERMINATION BY COMPANY.

     Executive's employment with the Company may be terminated by the Company
under the following conditions:

          5.1   TERMINATION ON DEATH OR DISABILITY. The Executive's employment
hereunder shall terminate without notice upon the death of the Executive. The
Company may, at its discretion, terminate the employment of the Executive in the
event that the Executive becomes disabled, as defined in Section 5.1.1 hereof.

                5.1.1   For the purposes of this Agreement, the Executive will
be deemed to be disabled in the event that he is unable to perform properly the
essential duties of his position for a period of 90 consecutive days or for an
aggregate period of 180 days in any period of 365 days.

          5.2   TERMINATION FOR CAUSE. The Company may terminate Executive's
employment under this Agreement for cause ("Cause") by delivery of written
notice to Executive specifying the cause or causes relied upon for such
termination. Any notice of termination given pursuant to this Section 5.2 shall
effect termination as of the date specified in such notice.

     Grounds for the Company to terminate Executive's employment under this
Agreement for Cause shall be limited to the occurrence of any of the following
events:

                                       3.
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                5.2.1   The willful failure, neglect or refusal by Executive to
perform his duties pursuant to Section 2.3 or Section 3.1.

                5.2.2   Executive's engagement or participation in any manner in
any activity which is directly competitive with or intentionally injurious to
the Company or which violates any provision of Sections 9 or 10 of this
Agreement.

                5.2.3   Executive's commission of any fraud against the Company
or use or appropriation for his personal use or benefit of any material,
property or funds of the Company not authorized by the Board to be so used or
appropriated, or Executive's conviction of any crime involving dishonesty or
moral turpitude.

                5.2.4   Conduct by the Executive which in the good faith and
reasonable determination of the Board demonstrates gross unfitness to serve in
Executive's position.

          5.3   TERMINATION WITHOUT CAUSE. The Company may terminate the
Executive's employment without cause ("Without Cause") upon delivery of written
notice to the Executive at any time, which notice shall specify the effective
date of termination.

     6.   VOLUNTARY TERMINATION BY EXECUTIVE.

          6.1   Executive may terminate his employment voluntarily by giving the
Company ninety (90) days advance notice in writing, at which time the provisions
of Section 7.2 shall apply. The Company may, in its sole discretion, waive the
notice in whole or in part. In such circumstances, notwithstanding the waiver,
the Company shall continue to provide to the Executive his normal compensation
for the 90 day period, so long as the Executive is otherwise in compliance with
the terms of this Agreement.

     7.   COMPENSATION UPON TERMINATION.

          7.1   DEATH OR DISABILITY.

                7.1.1   BY DEATH. Upon termination of Executive's employment in
the event of death, the Company shall pay to Executive's beneficiaries or his
estate, as the case may be, any Accrued Compensation. The Company shall
thereafter have no further obligations to Executive under this Agreement. The
term "Accrued Compensation" as used in this Agreement, shall mean any Base
Salary, any bonus compensation to the extent earned, any vested deferred
compensation (other than pension plan or profit-sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
the Company in which Executive is a participant to the full extent of
Executive's rights under such plans, including without limitation, the Photon
Dynamics, Inc. 1995 Stock Option Plan, any accrued vacation pay and any
appropriate business expenses incurred by Executive in connection with his
duties hereunder, accrued and owing as at the date of termination of the
Executive's employment.

                7.1.2   ON DISABILITY. In the event that the Executive becomes
disabled, the Company shall continue the Executive's salary and benefits until
such date as the Executive is eligible to apply for benefits pursuant to the
Company sponsored long term disability plan ("the Plan"). In the event that the
Executive qualifies for benefits pursuant to the Plan, the

                                       4.
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payment of employment compensation shall cease, save that insured benefits shall
continue in accordance with the terms of the Plan in force from time to time. In
the event that the Company elects to terminate the employment of the Executive
during his disability, the Executive shall, in full and final settlement of any
entitlement which he may have arising from the termination of his employment, be
entitled to (i) payment of salary only, at his final pre-disability rate, for
the Salary Continuation Period calculated in accordance with Section 7.3 hereof
and (ii) the vesting of Options which would, save for the termination of the
Executive's employment, have vested during such Salary Continuation Period. The
assignment of the Executive's duties to other persons during the Executive's
disability shall not constitute a termination of the Executive's employment.

          7.2   FOR CAUSE, VOLUNTARY TERMINATION BY EXECUTIVE OR RETIREMENT. If
Executive's employment is terminated by the Company for Cause, is voluntarily
terminated by Executive, or if the Executive reaches normal retirement age, the
Company shall pay Executive his Accrued Compensation to the date of such event
and the Company shall thereafter have no further obligations to Executive under
this Agreement.

          7.3   WITHOUT CAUSE. If Executive's employment is terminated by the
Company Without Cause, Executive shall be entitled to the following: (i)
continuation of Executive's Base Salary at his then current rate from the date
of termination for a period equivalent to twelve (12) months plus one month for
each complete year of service with the Company as of the date of termination
("the Salary Continuation Period") to an aggregate maximum period of salary
continuation of eighteen (18) months; (ii) the vesting of Options which, save
for the termination of the Executive's employment would have otherwise vested in
the Salary Continuation Period (iii) continuation of bonus entitlement during
the Salary Continuation Period, at the rate fixed as the target bonus for the
fiscal year in which termination occurs, such bonus entitlement to be paid at
the normal time in accordance with the provisions of Section 4.2 hereof, (iv)
subject to any necessary third party approval, continuation of Executive's
participation in any benefit plans maintained by the Company for the Executive's
benefit, for the statutorily mandated period, arid (v) all Accrued Compensation.
All payments made to the Executive shall be subject to standard deductions and
withholdings. The Executive shall have 3 months from the last day of the Salary
Continuation Period to exercise options vested in him as at that date which have
been granted pursuant to the Photon Dynamics, Inc. 1995 Stock Option Plan.

          7.4   NO MITIGATION. Executive shall not be required to mitigate the
amount of any payment contemplated by this Section 7, whether by seeking new
employment or in any other manner.

          7.5   FULL AND FINAL SATISFACTION. The provision by the Company of
payments and benefits in accordance with Section 7.3 shall constitute full and
final satisfaction of any and all actions, claims, or demands of any nature or
kind which Executive may have against the Company or its affiliates or related
companies with respect to notice of termination of this employment, pay in lieu
of notice, or severance, whether under contract, statute or otherwise.

                                       5.
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     8.   RESIGNATION UPON A CHANGE OF CONTROL

          8.1   The Executive may, within 30 days of a Change of Control as
hereinafter defined, resign his employment hereunder, in which case the
termination of the Executive's employment shall be treated as a termination
without cause in accordance with Section 7.3 hereof. For the purpose of this
section, a Change of Control will be deemed to have occurred if (i) a person,
partnership or group, other than (a) a party related to Photon Dynamics, Inc.,
or (b) a group which includes directly or indirectly members of the management
of the Company, acquires no less than 51% of the shares entitled to vote in the
election of the directors of the Company; or (ii) the Company sells or otherwise
disposes of all or substantially all of its assets.

     9.   CONFIDENTIAL INFORMATION, INVENTIONS, ETC.

          9.1   DEFINITIONS. In this Section 9, the following words have the
following meanings:

                (a)   "BUSINESS SECRETS" means confidential or sensitive
business information, including without limitation, such information as a
director, officer or senior employee of the Company may, from time to time,
designate as being confidential information, secrets, trade secrets, data,
business strategies, plans, contracts, financial records and budgets, marketing
techniques, pricing policies, costing information, customer and supplier lists
and records, and when used in connection with Company's Contractors, also
includes plans and layout of their manufacturing and processing systems and any
information relating to the security of their premises;

                (b) "DOCUMENTATION" means all materials constituting or
containing Technology or Business Secrets, including electronic storage media.

                (c) "COMPANY'S CONTRACTORS" means customers, suppliers,
partners, co-venturers and other contractors of the Company and also includes
potential customers of the Company in respect of whom access to Business Secrets
has been obtained for the purpose of evaluating proposed projects or for
submitting of tenders, bids or proposals.;

                (d) "TECHNOLOGY" means all inventions, processes, discoveries,
procedures, technical date, computer programs, protocols, product technical
specifications including installation, performance and maintenance
specifications, patents, designs, drawings, manuals and generally all knowledge,
know-how, expertise and information of a technical nature, whether or not
protected under patent, design, copyright or other intellectual property laws,
and includes any and all future changes, modifications additions, improvements
and enhancements thereof.

          9.2   TRUST. The Company and the Executive acknowledge and agree that
the relationship between them is one of mutual trust and reliance.

          9.3   ACCESS TO INFORMATION. The Executive acknowledges that he may
have access to information and knowledge, including Business Secrets and
Technology of the Company or the Company's Contractors, relating to aspects of
the business of the Company or the Company's Contractors, respectively, the
disclosure of any thereof to the competitors or

                                       6.
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customers of the Company or the Company's Contractor, respectively, or the
general public may be highly detrimental to the interests of the Company of the
Company's Contractors.

          9.4   DEALING WITH SECRETS. Wherever the Executive is required by the
terms of this Agreement to obtain or have authorization to disclose or otherwise
deal with Business Secrets and Technology, it is the Executive's duty to
reasonably satisfy himself, after making due inquiry, that the person giving
such authorization has the right to give it.

          9.5   TECHNOLOGY AND BUSINESS SECRETS OF COMPANY'S CONTRACTORS. The
Executive shall not divulge Technology or Business Secrets belonging to the
Company's Contractors to any persons whatsoever, other than to:

                (a) other employees of Company who are working on the same
project and have a need to know such Technology or Business Secrets;

                (b) employees of the Company's Contractors to whom the
Technology or Business Secrets belong and who the Executive is reasonably
satisfied, after making due inquiry, are authorized to have same; and

                (c) persons to whom the Executive is authorized and directed in
writing by competent authority to release such Technology or Business Secrets,
and only then to the extent of such authorizations.

          9.6   PROCEDURES. The Executive shall always:

                (a) exercise reasonable care and diligence to protect the
confidentiality and integrity of Technology or Business Secrets belonging to the
Company's Contractors; and

                (b) strictly adhere to all policies, procedures and directions
of the Company relating to the protection and custody of Technology and Business
Secrets of Company's Contractors.

          9.7   CONFIDENTIALITY. All Technology and Business Secrets belonging
to Company's Contractors shall be assumed by the Executive to be confidential.

          9.8   SECRETS USED ONLY IN PERFORMANCE OF DUTIES. The Executive shall
only use Technology and Business Secrets belonging to Company's Contractors in
performance by the Executive of his duties in connection with the Company's
Contracts for such person, and for no other use whatsoever.

          9.9   COMPANY TECHNOLOGY AND BUSINESS. The Executive acknowledges and
agrees:

                (a) that all of the Company's Technology and Business Secrets,
whether disclosed by the Company, employees or agents or otherwise obtained by
the Executive, constitute trade secrets and proprietary information of the
Company and are, and at all time shall remain, the sole and exclusive property
of the Company and the Company has all right, title and interest therein;

                                       7.
<PAGE>

                (b) to maintain the absolute confidentiality of the Company's
Technology and Business Secrets and not to disclose directly or indirectly, at
any time, either during or after the termination of the Executive's employment
with the Company, to any person any of the Company's Technology and Business
Secrets, other than to employees of the Company who have a need to know same and
who the Executive reasonably believes have signed an agreement containing the
same or substantially the same obligations as those contained in this Section 9,
unless otherwise instructed in writing by the Company; and

                (c) not to use, at any time, either during or after the
termination of the Executive's employment with the Company any of the Company's
Technology or Business Secrets for the Executive's own benefit or purposes for
the benefit or purposes of any other person, firm, partnership, associations,
corporation or other business entity or enterprise.

          9.10  SUBSIDIARY INCLUDED. For the purpose of Section 9.9, Technology
and Business Secrets of the Company include the Technology and Business Secrets
of any subsidiary or affiliate of the Company.

          9.11  OBLIGATIONS UPON AND SUBSEQUENT TO TERMINATION. Upon termination
of the Executive's employment with the Company, the Executive shall forthwith
return to the Company all Documentation relating to the Technology and Business
Secrets.

          9.12  OBLIGATIONS SURVIVE TERMINATION. The obligations of the
Executive as set out in Sections 9.2 to 9.11 hereof, inclusive, shall continue
in full force and effect after termination of the Executive's employment with
the Company for a period of five years, and regardless of the reason or cause of
such termination; provided, however, such obligations as they relate to
Company's Technology and Business Secrets shall, subject to any intellectual
property rights therein, only continue with respect to any of such information
until such information becomes part of the public domain through no improper
conduct or fault of the Executive.

          9.13  NEW TECHNOLOGY. The Executive agrees if during the course of his
employment he creates any Technology relating to or useful in the business of
the Company or any of its subsidiaries or affiliates, either solely or jointly
with others, he shall promptly disclose it in writing to the Company and it
shall be the sole and exclusive property of the Company.

          9.14  ASSIGNMENT OF RIGHTS TO INTELLECTUAL PROPERTY. The Executive
hereby assigns to the Company all of his right, title and interest in any
copyright to works, including, without limitation, computer programs, which he
authors, either solely or jointly with others, during the course of this
employment and does hereby further waive any moral rights subsisting therein.

          9.15  TRANSFER OF TECHNOLOGY. Upon request, the Executive shall
execute and deliver any and all applications, assignments and other instruments
that the Company reasonably considers necessary in order to apply for and obtain
patents in Canada or foreign countries or in order to assign and convey to the
Company all of the right, title and interest in such Technology. These
obligations shall continue beyond the termination of the Executive's employment,
for whatever reason or cause, with respect to Technology conceived or created by
him during his

                                       8.
<PAGE>

employment. The expense of applying for and obtaining any patent or other
intellectual property rights shall be borne entirely the Company.

     10.  RESTRICTIONS ON COMPETITION BY THE EXECUTIVE

          10.1  COMPETITION AFTER TERMINATION. During the Executive's employment
hereunder and for the period which is the greater of (i) twelve months following
termination, irrespective of the reason for termination; and (ii) the Salary
Continuation Period, the Executive shall not, without the express written
consent of the Board:

                (a) engage in, assist or have an active interest in (whether on
his own or as a partner, officer, director, directly or indirectly or otherwise)
or enter the employment of or act as agent for or provide advice or consultation
to any person, firm, partnership, association, corporation, or any other form of
business entity or enterprise which is at that time engaged in or is about to
become engaged in a business or business activity which competes with a business
or business activity carried on by the Company or any of its subsidiaries or
affiliates in the Prescribed Area as hereinafter defined.

                (b) solicit or attempt to solicit or accept orders or negotiate
agreements on his own behalf or on behalf of any other person, firm partnership,
association, corporation, or any other form of business enterprise (other than
for the Company, its subsidiaries or affiliates during the duration of his
employment) for products or services, competitive with the products or services
of the Company, its subsidiaries or affiliates, from or with any prior, existing
or potential customers of the Company, its subsidiaries or affiliates. For the
purpose of the paragraph, "potential customers" shall be defined as a customer
contacted by the Company or any of its representatives or subsidiaries or
affiliates, during the twelve months prior to the date of the termination of
Executive's employment with the Company; and

                (c) solicit or attempt to solicit any employees of the Company,
its subsidiaries or affiliates or take any action that impairs the relations
between the Company, its subsidiaries or affiliates and their employees or which
may otherwise be detrimental to the business conducted by the Company, its
subsidiaries or affiliates.

          10.2  PRESCRIBED AREA. For the purposes of Section 10.1, Prescribed
Area shall be defined as the United States of America and Canada.

     11.  REMEDIES

          11.1  RESTRICTIONS REASONABLE. Executive acknowledges and agrees that
the restrictions set out in Sections 9 and 10 hereof are reasonable and
necessary for the protection of the Company, its subsidiaries and affiliates,
and such restrictions are conditions precedent to the Company entering into the
Agreement.

          11.2  BREACH OF COVENANTS. The Executive acknowledges, covenants and
agrees to the following:

                (a) that a breach of any of the covenants set forth in Sections
9 and 10 hereof will cause irreparable harm to the Company; and

                                       9.
<PAGE>

                (b) that in the event of a breach or intended breach of any
provision or covenant of Sections 9 and 10 hereof, the Company, in addition to
any other relief available, shall be entitled to temporary and permanent
injunctive relief; and

                (c) that the restrictions, covenants and obligations in Sections
9, 10 and 11 hereof continue to apply notwithstanding the manner or reason for
the termination of the employment of the Executive whether the Executive is
terminated with or without notice or contrary to the provisions of this
Agreement.

     12.  GENERAL

          12.1  SEVERABILITY. If any provision or covenant of this Agreement
should be held invalid or unenforceable for any reason or violates the laws of
the Province of Ontario, this Agreement shall be considered to be severable as
to such provision or covenant and such shall be deemed deleted from this
Agreement. The remainder of this Agreement shall be valid and binding upon the
parties as if such provision or covenant was not included herein. For purposes
of this Agreement, each and every subsection, paragraph, sub-paragraph and
clause shall be deemed to be a separate covenant.

          12.2  ENTIRE AGREEMENT. This Agreement constitutes the entire
Agreement between the parties hereto with respect to the subject mater hereof
and supersedes any or all prior negotiations representations, warranties,
undertakings and understandings. This Agreement may not be varied, modified, or
amended except by an instrument duly executed by both parties hereto.

          12.3  HEADINGS. Headings are not considered to be part of this
Agreement, are included solely for convenience, and are not intended to be full
or accurate description of the contents of the sections or paragraphs herein.

          12.4  GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.

          12.5  EXPRESSIONS. As used herein, the terms "this Agreement",
"hereby", "hereunder" and "hereof" and similar expressions refer to this
Agreement as a whole and not any particular section, paragraph, subparagraph or
other portion hereof, unless the context clearly requires otherwise. Where
required by the context hereof, the singular shall include the plural and the
masculine gender shall include the feminine and neuter gender as the case may be
vice versa.

          12.6  ASSIGNMENT. The provisions hereof shall enure to the benefit of
and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors, assigns and other legal representatives, provided
that this Agreement and the rights hereunder are personal to the Executive and
shall not be subject to voluntary or involuntary alienation, assignment or
transfer by the executive.

          12.7  WAIVER. The failure of either party at any time to require
performance by the other party of any provision hereof shall in no way affect
the full right to require such performance at any time thereafter, nor shall
waiver by either party of the breach of any

                                      10.
<PAGE>

provision hereof be taken or held to be a waiver of any succeeding breach of
such provision or as a waiver of the provision itself. No waiver shall be
binding except by an instrument duly executed by both parties hereto.

          12.8  EXECUTIVE REPRESENTATIONS AND WARRANTIES. The Executive
represents and warrants to the Company that:

                (a) he is not party to any other contract of employment, written
or oral other than an agreement dated October 15, 1998, between the Executive
and the Company; and

                (b) the entering into this Agreement and the performance of
these obligations hereunder do not and will not breach the terms of any other
agreement or obligations, fiduciary or otherwise, to which he is a party or by
which he is bound.

          12.9  LEGAL ADVICE. The Executive confirms that he has had an
opportunity to obtain independent legal advice regarding the terms hereof.
Further, it is confirmed by the Executive that this Agreement has been entered
into freely, voluntarily and without duress.

          12.10 INTERPRETATION. The terms and conditions of this Agreement are
the result of negotiations between the Company and the Executive. The Executive
therefore agrees that this Agreement shall not be construed in favour of or
against any party by reason of the extent to which any party or its professional
advisors participated in the preparation of this Agreement.

          12.11 NOTICES. Wherever notice is required or permitted by this
Agreement, notice shall be in writing and shall be delivered personally to the
party to whom it is given or sent by prepaid registered mail, addressed as
follows:

         if to the Company:

         Image Processing Systems Inc.
         221 Whitehall Drive
         Markham, Ontario L3R 9T1

         Attention: Chairman

         if to the Executive:

         Kenneth Wawrew
         19 Granville Gate
         Markham, Ontario L3R 4J2

         and each such notice shall be deemed given on the date of delivery in
the case of personal delivery, or five business days after mailing in the case
of mail. No notice may be given by mail during a real or apprehended postal
strike in Canada. The parties may change their designated addresses by giving
notice as provided above.

          12.12 ALTERATION OF TERMS. Except as specifically provided in this
Agreement, no amendment to this Agreement shall be binding unless executed in
writing by the parties hereto.

                                      11.
<PAGE>

     The parties have duly executed and delivered this Agreement as of October
13th, 2000.

                                             IMAGE PROCESSING SYSTEMS INC.

                                             By: /s/ CAMERON MINGAY
                                                 -------------------------------
                                             Title - Secretary

                                             KENNETH WAWREW

                                             By: /s/ KENNETH WAWREW
                                                 -------------------------------
                                             Title - President

                                      12.<PAGE>

                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
effective as of November 17, 2000, by and between Maxim Pharmaceuticals, Inc.,
(the "Company"), and Kurt R. Gehlsen, Ph.D. ("Executive"). The Company and
Executive are hereinafter collectively referred to as the "Parties," and
individually referred to as a "Party."

                                    RECITALS

         A.       The Company desires assurance of the association and services
of Executive in order to retain Executive's experience, skills, abilities,
background and knowledge, and is willing to engage Executive's services on the
terms and conditions set forth in this Agreement.

         B.       Executive desires to be in the employ of the Company, and is
willing to accept such employment on the terms and conditions set forth in this
Agreement.

                                    AGREEMENT

         In consideration of the foregoing recitals and the mutual promises and
covenants herein contained, and for other good and valuable consideration, the
Parties, intending to be legally bound, agree as follows:

1.       EMPLOYMENT.

         1.1      The Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company, upon the terms and conditions set
forth in this Agreement, effective as of the date first set forth above
("Commencement Date"). This Agreement shall continue in effect until terminated
pursuant to Section 5 below.

         1.2      Executive shall be the Vice-President, Development and Chief
Technical Officer of the Company (or a position of at least comparable status)
and shall serve in such other capacity or capacities as the Chief Executive
Officer and/or the Company's Board of Directors ("Board") may from time to time
prescribe.

         1.3      Executive shall do and perform all services, acts or things
necessary or advisable to manage and conduct the business of the Company and
which are normally associated with the position of Vice-President, Development
and Chief Technical Officer, consistent with the Bylaws of the Company, as well
as its general employment policies and practices, including, but not limited to
management of the Company's research and development programs issuing from its
technologies, including; primary responsibility for business development and
corporate partnering activities, over-site and administration of clinical
trials, supervision of collaborator and contract laboratory relationships,
planning and supervision of research programs, preparation of strategic
development and marketing plans for the Company's technologies, evaluation of
scientific and other technologies for acquisition, and participation in
financing presentations and otherwise representing the Company at various
meetings. However, at all times during his employment Executive shall be subject
to the direction and policies from time to time established by the Board and/or
the Chief Executive Officer.

         1.4      Unless the Parties otherwise agree in writing, during the term
of this Agreement, Executive shall perform the services he is required to
perform pursuant to this Agreement at the Company's offices, located at 8899
University Center Lane, Suite 400 or at any other place at which the Company
maintains an office; provided, however, that the Company may from time to time
require Executive to travel temporarily to other locations in connection with
the Company's business.

<PAGE>

2.       LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION.

         2.1      During his employment by the Company, Executive shall devote
his full business energies, interest, abilities and productive time to the
proper and efficient performance of his duties under this Agreement.

         2.2      During the term of this Agreement, Executive shall not engage
in competition with the Company, either directly or indirectly, in any manner or
capacity, as adviser, principal, agent, partner, officer, director, employee,
member of any association or otherwise, in any phase of the business of
developing, manufacturing and marketing of products which are in the same field
of use or which otherwise compete with the products or proposed products of the
Company.

         2.3      Ownership by Executive, as a passive investment, of less than
one percent (1%) of the outstanding shares of capital stock of any corporation
with one or more classes of its capital stock listed on a national securities
exchange or publicly traded in the over-the-counter market shall not constitute
a breach of this paragraph.

3.       COMPENSATION OF EXECUTIVE.

         3.1      While employed by the Company, as compensation for proper and
satisfactory performance of all duties to be performed hereunder, the Company
shall pay Executive an annual base salary of Two Hundred Sixty Thousand Dollars
($260,000) per year (the "Base Salary"), payable in regular periodic payments in
accordance with Company policy. Such salary shall be prorated for any partial
year of employment on the basis of a 365-day fiscal year. In addition, Executive
will be eligible for an incentive bonus of up to 25% of Base Salary, based upon
defined milestones, during the agreement period. In addition, Executive will
receive $75,000 upon approval of the U.S. NDA for Ceplene if such approval is
obtained by November 17, 2002.

         3.2      Executive's compensation may be changed from time to time by
mutual agreement of Executive and the Board.

         3.3      All of Executive's compensation shall be subject to customary
withholding taxes and any other employment taxes as are commonly required to be
collected or withheld by the Company.

         3.4      Executive shall be entitled to vacation and illness days
consistent with the Company's standard practice for its employees generally.

         3.5      Executive shall, at the discretion of the Board, be entitled
to participate in the benefits for which he is eligible under the terms and
conditions of the standard Company benefits which may be in effect from time to
time and provided by the Company.

4.       EXPENSE REIMBURSEMENT.

         4.1      Executive shall be entitled to receive prompt reimbursement of
all reasonable business and travel expenses incurred by Executive in connection
with the business of the Company. Such expenses must be properly accounted for
under the policies and procedures established by the Company.

5.       TERMINATION.

         5.1      The Company may terminate Executive's employment under this
Agreement "for cause" by delivery of written notice to Executive specifying the
cause or causes relied upon for such termination. If Executive's employment
under this Agreement is terminated by the Company for cause under this section,
Executive shall be entitled to receive only accrued Base Salary and other
accrued benefits required by law, prorated to the date of termination. Executive
will not be entitled to severance pay, pay in lieu of notice or any other such
compensation. Grounds for the Company to terminate this Agreement "for cause"
shall be limited to the occurrence of any of the following events:

                                       2
<PAGE>

                  5.1.1    If Executive is in material breach of any
provision of this Agreement;

                  5.1.2    Executive's engaging or in any manner
participating in any activity which is competitive with or intentionally
injurious to the Company or which violates any provision of Section 7 of this
Agreement;

                  5.1.3    Executive's commission of any fraud against the
Company or use or appropriation for his personal use or benefit of any funds
or properties of the Company not authorized by the Board to be so used or
appropriated;

                  5.1.4    Executive's conviction of any crime involving
dishonesty or moral turpitude;

                  5.1.5    Conduct by Executive which in good faith and
reasonable determination of the Board demonstrates gross unfitness to serve.

         Any notice of termination given pursuant to this Section 5.1 shall
effect termination as of the date specified in such notice or, in the event no
such date is specified, on the last day of the month in which such notice is
delivered or deemed delivered as provided in Section 9 below.

         5.2      The Company may terminate the Executive's employment at any
time without cause upon delivery of written notice to the Executive. Any notice
of termination given pursuant to this Section 5.2 shall effect termination as of
the date specified in such notice or, in the event no such date is specified, on
the last day of the month in which such notice is delivered or deemed delivered
as provided in Section 9 below. If such termination shall occur under this
Section 5.2, then, in lieu of all other remedies and as liquidated damages,
Executive shall be entitled to continuation of Base Salary and health benefits
for a period of six (6) months from said date of termination with such Base
Salary continuation to be at the rate set forth in Section 3.1 or, if greater,
at the rate of Executive's then current compensation in effect as of the date of
termination.

         5.3      The parties may mutually agree at any time to terminate this
Agreement upon such terms and conditions as may be agreed upon in writing.

         5.4      This Agreement shall terminate without notice upon the date of
Executive's death or the date when Executive becomes "completely disabled" as
that term is defined in Section 6.2

         5.5      Notwithstanding any provision to the contrary herein, unless
otherwise provided herein or unless otherwise provided by law, Executive may at
any time terminate his employment with the Company hereunder. In such event, the
Company shall not be liable to Executive for the payment of any amount other
than accrued Base Salary and other accrued benefits required by law, prorated to
the date of termination. Executive will not be entitled to severance pay, pay in
lieu of notice or any other such compensation.

6.       DEATH OR DISABILITY DURING TERM OF EMPLOYMENT.

         6.1      Upon termination of Executive's employment pursuant to Section
5.4, Executive or his estate or personal representative, as the case may be,
shall be entitled to receive Executive's Base Salary and benefits for a period
of one month following the date of death or the date when Executive becomes
completely disabled.

         6.2      The term "completely disabled" as used in this Agreement shall
mean the inability of Executive to perform the essential functions of his
position under this Agreement by reason of any incapacity, physical or mental,
which the Board of the Company, based upon medical advice or an opinion provided
by a licensed physician acceptable to the Board of the Company and approved by
the Executive, which approval shall not be unreasonably withheld, determines to
have incapacitated Executive from satisfactorily performing any or all essential
functions of his position for the Company during the foreseeable future. Based
upon such medical advice or opinion, the determination of the

                                       3
<PAGE>

Board of the Company shall be final and binding and the date such determination
is made shall be the date of such complete disability for purposes of this
Agreement.

7.       CONFIDENTIAL INFORMATION; NONSOLICITATION.

         7.1      Executive recognizes that his employment with the Company will
involve contact with information of substantial value to the Company, which is
not old and generally known in the trade, and which gives the Company an
advantage over its competitors who do not know or use it, including but not
limited to, techniques, designs, drawings, processes, inventions, developments,
equipment, prototypes, sales and customer information, and business and
financial information relating to the business, products, practices and
techniques of the Company (hereinafter referred to as "Confidential
Information"). Executive will at all times regard and preserve as confidential
such Confidential Information obtained by Executive from whatever source and
will not, either during his employment with the Company or thereafter, publish
or disclose any part of such Confidential Information in any manner at any time,
or use the same except on behalf of the Company, without the prior written
consent of the Company. As a condition of this Agreement, Executive will sign
and return a copy of the Company's "Proprietary Information and Inventions
Agreement," attached as Exhibit A.

         7.2      While employed by the Company and for one (1) year thereafter,
the Executive agrees that in order to protect the Company's confidential and
proprietary information from unauthorized use, that Executive will not, either
directly or through others, solicit or attempt to solicit any employee,
consultant or independent contractor of the Company to terminate his or her
relationship with the Company in order to become an employee, consultant or
independent contractor to or for any other person or business entity; or the
business of any customer, vendor or distributor of the Company which, at the
time of termination or one (1) year immediately prior thereto, was listed on
Company's customer, vendor or distributor list.

8.       ASSIGNMENT AND BINDING EFFECT.

         8.1      This Agreement shall be binding upon and inure to the benefit
of Executive and Executive's heirs, executors, personal representatives,
assigns, administrators and legal representatives. Because of the unique and
personal nature of Executive's duties under this Agreement, neither this
Agreement nor any rights or obligations under this Agreement shall be assignable
by Executive. This Agreement shall be binding upon and inure to the benefit of
the Company and its successors, assigns and legal representatives.

9.       NOTICES.

         9.1      All notices or demands of any kind required or permitted to be
given by the Company or Executive under this Agreement shall be given in writing
and shall be personally delivered (and receipted for) or mailed by certified
mail, return receipt requested, postage prepaid, addressed as follows:

                  9.1.1    If to the Company:

                           LARRY G. STAMBAUGH
                           MAXIM PHARMACEUTICALS, INC.
                           8899 UNIVERSITY CENTER LANE
                           SUITE 400
                           SAN DIEGO, CA 92122

                                       4
<PAGE>

                  9.1.2    If to Executive:

                           KURT R. GEHLSEN, PH.D.
                           MAXIM PHARMACEUTICALS, INC.
                           8899 UNIVERSITY CENTER LANE
                           SUITE 400
                           SAN DIEGO, CA  92122

Any such written notice shall be deemed received when personally delivered or
three (3) days after its deposit in the United States mail as specified above.
Either Party may change its address for notices by giving notice to the other
Party in the manner specified in this section.

10.      CHOICE OF LAW.

         10.1     This Agreement is made in San Diego, California. This
Agreement shall be construed and interpreted in accordance with the laws of the
State of California.

11.      INTEGRATION.

         11.1     This Agreement contains the complete, final and exclusive
agreement of the Parties relating to the subject matter of this Agreement, and
supersedes all prior oral and written employment agreements or arrangements
between the Parties.

12.      AMENDMENT.

         12.1     This Agreement cannot be amended or modified except by a
written agreement signed by Executive and the Company.

13.      WAIVER.

         13.1     No term, covenant or condition of this Agreement or any breach
thereof shall be deemed waived, except with the written consent of the Party
against whom the wavier in claimed, and any waiver or any such term, covenant,
condition or breach shall not be deemed to be a waiver of any preceding or
succeeding breach of the same or any other term, covenant, condition or breach.

14.      SEVERABILITY.

         14.1     The finding by a court of competent jurisdiction of the
unenforceability, invalidity or illegality of any provision of this Agreement
shall not render any other provision of this Agreement unenforceable, invalid or
illegal. Such court shall have the authority to modify or replace the invalid or
unenforceable term or provision with a valid and enforceable term or provision
which most accurately represents the parties' intention with respect to the
invalid or unenforceable term or provision.

15.      INTERPRETATION; CONSTRUCTION.

         15.1     The headings set forth in this Agreement are for convenience
of reference only and shall not be used in interpreting this Agreement. This
Agreement has been drafted by legal counsel representing the Company, but
Executive has been encouraged, and has consulted with, his own independent
counsel and tax advisors with respect to the terms of this Agreement. The
Parties acknowledge that each Party and its counsel has reviewed and revised, or
had an opportunity to review and revise, this Agreement, and the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement.

                                       5
<PAGE>

16.      REPRESENTATIONS AND WARRANTIES.

         16.1     Executive represents and warrants that he is not restricted or
prohibited, contractually or otherwise, from entering into and performing each
of the terms and covenants contained in this Agreement, and that his execution
and performance of this Agreement will not violate or breach any other
agreements between Executive and any other person or entity.

17.      COUNTERPARTS.

         17.1     This Agreement may be executed in two counterparts, each of
which shall be deemed an original, all of which together shall contribute one
and the same instrument.

         IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.

                               The Company:

                               MAXIM PHARMACEUTICALS, INC.

                               By:   /s/ LARRY G. STAMBAUGH
                               ------------------------------------------
                               Larry G. Stambaugh
                               Chairman of the Board, President and Chief
                               Executive Officer

                               EXECUTIVE:

                               /s/ KURT R. GEHLSEN
                               ------------------------------------------
                               Kurt R. Gehlsen, Ph.D.

                                       6

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