Document:

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                              EMPLOYMENT AGREEMENT

         THIS AGREEMENT ("Agreement") is made and entered into as of September
1, 2000 by and between WILLIAM C. MORTIMORE (the "Executive") and MERGE
TECHNOLOGIES INCORPORATED, a Wisconsin corporation (the "Company").

                                R E C I T A L S:

         A. The Company is engaged in the provision of medical diagnostic
imaging connectivity hardware, software and consulting solutions therefor, for
healthcare facilities. The business in which the Company is engaged in
time-to-time during the term of this Agreement, inclusive of those new lines of
business, if any, in which the Company is working toward entering from
time-to-time are hereinafter collectively referred to as the "Business"; and

         B. The Company desires to employ the Executive and the Executive
desires to accept such employment;

                  NOW THEREFORE, in consideration of the promises, mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and the Executive do hereby agree as follows:

                  1. Employment and Duties. On the terms and subject to the
conditions set forth in this Agreement, the Company agrees to employ the
Executive as the Chairman of the Company, to perform such duties as may be
assigned, from time to time, by the Board of Directors of the Company (the
"Board") and to render such additional services and discharge such other
responsibilities as the Board may, from time to time, stipulate.

                  2. Performance. The Executive accepts the employment described
in Section 1 of this Agreement and agrees to devote all of his working time and
efforts to the faithful and diligent performance of the services described
herein, including the performance of such other services and responsibilities as
the Board may, from time to time, stipulate. Without limiting the generality of
the foregoing, the Executive ordinarily shall devote not less than five days per
week except for regular business holidays observed by the Company, the
Executive's vacation days, and days allowed for sick leave to his employment
with respect to the Company Business.

                  3. Term. The term of employment under this Agreement shall
commence on September 1, 2000 (the "Commencement Date") and shall remain in
effect until terminated by either Executive or the Company by giving thirty (30)
days written notice of termination. The period of time in which Executive is
employed shall constitute the "Employment Period," and each calendar year or
portion of a calendar year during the Employment Period is hereinafter sometimes
referred to as a "Year." The parties agree that this Agreement may be terminated
by either party without cause or good reason, and without the obligation to pay
any severance pay, at any time, subject to the aforesaid notice requirement.

                  4. Salary. For all the services to be rendered by the
Executive hereunder, the Company agrees to pay a salary at a rate of no less
than sixteen thousand six hundred sixty-six and 67/100 dollars ($16,666.67) per
month ("Salary"), payable in the manner and frequency in which the Company's
payroll is customarily handled, and subject to annual review at the time annual
reviews of the salaries of other senior executive officers are to be conducted.

                  5. Bonus. During the Employment Period, the Executive shall be
eligible for an annual performance bonus of up to twenty-five percent (25%) of
Salary, dependent on achievement of defined performance targets. These targets
will be mutually agreed upon by the Executive and the Executive Committee of the
Board within sixty (60) days after commencement of each Year. For each Year the
annual performance bonus is to be paid, it shall be paid within thirty (30) days
of the completion of the year-end financial statements for that Year, but in no
event later than May 31 of the following year. Upon achievement of defined

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performance targets, the Executive will be eligible to receive a pro-rated bonus
equal to twenty-five percent (25%) of the annual performance bonus for calendar
year 2000, with respect to operations of the Company during the calendar year
2000. Any dispute as to whether Executive met the performance targets for a Year
shall be determined conclusively by the Executive Committee of the Board.

                  6.       Paid Time Off. The Executive shall be entitled to
paid time off for vacation,  illness,  holiday and  personal  reasons  in
accordance  with the  Company's  paid time off policy at the rate  offered  to
the most  senior employees of the Company with the longest tenure.

                  7.       Insurance.  During the  Employment  Period,  the
Company  shall be  entitled  to  procure  life insurance  for the  Company's
sole  benefit  and at the  Company's  sole cost and the  Executive  agrees to
cooperate  in obtaining such insurance.

                  8.       Disability Benefit. If at any time during the
Employment Period the Executive is permanently unable to perform fully his
duties hereunder by reason of illness, accident, or other disability (as
confirmed by competent medical evidence by a physician selected by the Executive
Committee), the Executive shall be entitled to receive periodic payments of
Salary to which he would otherwise be entitled pursuant to Section 4 of this
Agreement by reason of his employment for a period of two (2) months.
Notwithstanding the foregoing provision (i) the amounts payable to the Executive
pursuant to this Section 8 shall be reduced by any amounts received by the
Executive with respect to any such incapacity pursuant to any insurance policy,
plan, or other employee benefit provided to the Executive by the Company; and
(ii) in no event will the terms of this Agreement supersede any health or
disability benefit to which Executive is entitled under applicable state or
federal law.

                  9.       Executive Options. The Executive shall be granted
options to acquire one hundred forty-two thousand two hundred seventy-eight
(142,278) shares of the Company's common stock at the closing market price (the
"Strike Price") at the end of the day on the date immediately preceding the
Commencement Date. These options will vest at the rate of twenty-five percent
(25%) of the total number of shares subject to options (or thirty-five thousand
five-hundred sixty-nine (35,569) shares) beginning one year after the
Commencement Date and thereafter an additional twenty-five percent (25%) of such
number of shares will vest on each of the second, third and fourth year
anniversaries of the Commencement Date. The options will be exercisable for a
period of six (6) years from the Commencement Date, subject to the terms of the
Company's Employee Stock Option Plan (the "Plan"). Additional options may be
granted in succeeding years, in the sole discretion of the Board. In the event
that Executive is terminated without cause during the Employment Period and
prior to the first twenty-five percent (25%) of the total options referenced
herein vesting, upon such termination and at the sole discretion of the Board,
either: (i) thirty-five thousand five-hundred sixty-nine (35,569) shares
(aggregating twenty-five percent (25%) of the options referenced herein) will
vest immediately, or (ii) the Company will compensate Executive for such
unvested thirty-five thousand five-hundred sixty-nine (35,569) shares with the
difference between the Strike Price and the closing market price of the
Company's common stock as of the day of Executive's termination, adjusted by an
amount necessary to compensate Executive for the fact that such payment will be
taxed as ordinary income by the Internal Revenue Service and not as capital
gains.

         The Company's Employee Stock Option Plan currently has restrictions on
the quantity of options, which may be issued to any one participant per fiscal
year. The Company hereby agrees to resolve this limitation through a new
proposal or amendment at the November, 2000 Board meeting to permit the grant of
options for the number of shares called for herein. In the event that this has
not occurred by December 31, 2000, the Company shall award Executive the maximum
number of options allowable under the Plan for fiscal year 2000, and the maximum
number of options allowable under the plan for each Year thereafter until
Executive has been awarded 220,000 options. In the event Executive is terminated
following the first anniversary of the Commencement Date but before he has been
awarded 142,278 options, all of the options granted through the date of his
termination shall immediately vest, and in the sole discretion of the Board, the
Executive shall receive either (i) the number of options equal to the difference
between the number of options he was awarded through the date of his termination
and 142,278, which options shall immediately vest; or (ii) an amount equal to
the difference between the Purchase Price and the closing market price on the
date of termination multiplied by

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the number of options described in clause (i) of this sentence, adjusted by an
amount necessary to compensate Executive for the fact that such payment will be
taxed as ordinary income by the Internal Revenue Service and not as capital
gains. The Executive shall receive the options to be awarded under clause (i) of
the preceding sentence or the amount of money to be paid pursuant to clause (ii)
of the preceding sentence within thirty (30) days of his termination.

                  10.      Change in Control. In the event of a "change in
control" of the Company ("change in control" of the Company shall mean a change
in the ownership of fifty percent (50%) or more of the outstanding stock of the
Company in a single transaction or a change of fifty percent (50%) or more of
the members of the Board in a single transaction, other than pursuant to
nomination of a new slate of directors where there has been no material change
in beneficial ownership of the Company, within 180 days preceding such
nomination, then all of the options granted as of the Commencement Date (options
to purchase one hundred forty-two thousand two hundred seventy-eight (142,278)
shares) will immediately vest and become exercisable. In the event of a change
in control as (described above) and the Executive is: (i) involuntarily
terminated within 120 days following the change in control; or (ii) voluntarily
terminates his employment with the Company within 120 days, following either:
(a) any reduction in Executive's responsibilities or authority with respect to
the Business; (b) a reduction in Executive's compensation package, including
Salary, in effect immediately prior to the change in control; or (c) the
relocation of the Company's principal place of business more than 30 miles
further from Executive's residence as of the date of this Agreement; then the
Executive will be entitled to twelve (12) months Salary as a change in control
allowance, to be paid in a single payment within thirty (30) days of the
termination of Executive's employment.

                  11.      Share Purchase and Loan. During the first six (6)
months following the Commencement Date, the Executive will be entitled to
purchase up to two hundred thousand dollars ($200,000) of shares of common stock
from the Company's treasury ("Shares") at the closing price(s) of the Company's
common stock on the date(s) of purchase. The Company agrees to loan up to fifty
percent (50%) of the funds invested to purchase the Shares (up to one hundred
thousand dollars ($100,000)) as a full recourse loan bearing interest at the
Applicable Federal Rate at the time of the Loan and secured by a first security
interest in the Shares. In addition to the Promissory Note (the form of which is
attached as Exhibit A) and Security Agreement, Executive will be required to
deliver to the Company at the time of the Loan assignments separate from
certificate duly endorsed in blank by the Executive. Executive will be required
to pay interest monthly. The principal amount of the loan must be repaid by
Executive upon the earliest to occur of (i) sale of any of the Shares, (ii)
termination of Executive's employment with the Company, or (iii) six (6) years
from the date the loan is issued.

                  12.      Other Benefits.  Except as otherwise specifically
provided herein, during the Employment Period, the Executive shall be eligible
for all non-wage benefits the Company provides generally for its other salaried
employees.

                  13.      Business Expenses.

                           (a) Reimbursement. The Company shall reimburse the
                  Executive for the reasonable, ordinary, and necessary business
                  expenses incurred by him in connection with the performance of
                  his duties hereunder, including, but not limited to, ordinary
                  and necessary travel expenses and entertainment expenses and
                  mobile phone expenses.

                           (b) Accounting. The Executive shall provide the
                  Company with an accounting of his expenses, which accounting
                  shall clearly reflect which expenses are reimbursable by the
                  Company. The Executive shall provide the Company with such
                  other supporting documentation and other substantiation of
                  reimbursable expenses as will conform to Internal Revenue
                  Service or other requirements. All such reimbursements shall
                  be payable by the Company to the Executive promptly after
                  receipt by the Company of appropriate documentation therefor.

                  14.      Severance. In the event that the Executive is
terminated for any reason other than gross negligence, commission of a felony in
connection with his employment or material violation of any established

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Company policies, the Company shall pay the Executive, as a severance allowance,
an amount equal to four (4) months of his then current salary if such
termination occurs on or before February 28, 2001, five (5) months of his then
current salary if such termination occurs between March 1, 2001 and August 31,
2001, or six (6) months of his then current salary if such termination occurs
after September 1, 2001. The amount of the severance allowance provided for in
this Section 15 shall be paid in a single lump sum within thirty (30) days of
the termination of the Executive's employment. From time to time after September
1, 2001, the Executive's severance allowance shall be subject to review and
adjustment at the time reviews and adjustments of the severance allowance for
other senior executives of Company are to be conducted. Notwithstanding anything
to the contrary contained herein, in the event the Executive elects to receive
(pursuant to the operation of Section 11) twelve (12) months' Salary following a
change in control event and Executive's voluntary or involuntary termination,
then Executive shall not be entitled to any payment of severance pursuant to
this Section 15. In the event a change in control occurs and the Executive is
not entitled to twelve (12) months' Salary pursuant to Section 11, then the
Executive shall continue to be entitled to receive severance payments per this
Section 15.

                  15.      Surrender of Properties. Upon termination of the
Executive's employment with the Company, regardless of the cause therefor, the
Executive shall promptly surrender to the Company all property provided him by
the Company for use in relation to his employment, and, in addition, the
Executive shall surrender to the Company any and all confidential sales
materials, lists of customers and prospective customers, price lists, files,
patent applications, records, models, or other materials and information of or
pertaining to the Company or its customers or prospective customers or the
products, Business, and operations of the Company in his possession.

                  16.      Inventions and Secrecy. Except as otherwise provided
in this Section 17, the Executive:

                           (a) shall hold in a fiduciary capacity for the
                  benefit of the Company all secret or confidential information,
                  knowledge, or data of the Company or its Business or
                  production operations obtained by the Executive during his
                  employment by the Company, which shall not be generally known
                  to the public or recognized as standard practice (whether or
                  not developed by the Executive) and shall not, during his
                  employment by the Company and after the termination of such
                  employment for any reason, communicate or divulge any such
                  information, knowledge or data to any person, firm or
                  corporation other than the Company or persons, firms or
                  corporations designated by the Company;

                           (b) shall promptly disclose to the Company all
                  inventions, ideas, devices, and processes made or conceived by
                  him alone or jointly with others, from the time of entering
                  the Company's employ until such employment is terminated,
                  relevant or pertinent in any way, whether directly or
                  indirectly, to the Company's Business or production operations
                  or resulting from or suggested by any work which he may have
                  done for the Company or at its request;

                           (c) shall, at all times during his employment with
                  the Company, assist the Company (entirely at the Company's
                  expense) to obtain and develop for the Company's benefit
                  patents on such inventions, ideas, devices and processes,
                  whether or not patented; and

                           (d) shall do all such acts and execute, acknowledge
                  and deliver all such instruments as may be necessary or
                  desirable in the opinion of the Company to vest in the Company
                  the entire interest in such inventions, ideas, devices, and
                  processes referred to above.

The foregoing to the contrary notwithstanding, the Executive shall not be
required to assign or offer to assign to the Company any of the Executive's
rights in any invention for which no equipment, supplies, facility, or trade
secret information of the Company was used and which was developed entirely on
the Executive's own time, unless: (A) the invention related to (i) the Business
of the Company; or (ii) the Company's actual or demonstrably anticipated (with
the realistic prospect of occurring) research or development; or (B) the
invention results from any work performed by the Executive for the Company. The
Executive acknowledges his prior receipt of written notification of the
limitation set forth in the preceding sentence on the Executive's obligation to
assign or offer to assign to the Company the Executive's rights in inventions.

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                  17.      Confidentiality of Information: Duty of
Non-Disclosure.

                           (a) The Executive acknowledges and agrees that his
                  employment by the Company under this Agreement necessarily
                  involves his understanding of and access to certain trade
                  secrets and confidential information pertaining to the
                  Business of the Company. Accordingly, the Executive agrees
                  that after the date of this Agreement at all times he will
                  not, directly or indirectly, without the express consent of
                  the Company, disclose to or use for the benefit of any person,
                  corporation or other entity, or for himself any and all files,
                  trade secrets or other confidential information concerning the
                  internal affairs of the Company, including, but not limited
                  to, information pertaining to its customers, prospective
                  customers, services, products, earnings, finances, operations,
                  methods or other activities, provided, however, that the
                  foregoing shall not apply to information which is of public
                  record or is generally known, disclosed or available to the
                  general public or the industry generally, or known by
                  Executive prior to his employment with the Company. Further,
                  the Executive agrees that he shall not, directly or
                  indirectly, remove or retain, without the express prior
                  written consent of the Company, and upon termination of this
                  Agreement for any reason shall return to the Company, any
                  confidential figures, calculations, letters, papers, records,
                  computer disks, computer print-outs, lists, documents,
                  instruments, drawings, designs, programs, brochures, sales
                  literature, or any copies thereof, or any information or
                  instruments derived therefrom, or any other similar
                  information of any type or description, however such
                  information might be obtained or recorded, arising out of or
                  in any way relating to the Business of the Company or obtained
                  as a result of his employment by the Company. The Executive
                  acknowledges that all of the foregoing are proprietary
                  information, and are the exclusive property of the Company.
                  The covenants contained in this Section 18 shall survive the
                  termination of this Agreement.

                           (b) The Executive agrees and acknowledges that the
                  Company does not have any adequate remedy at law for the
                  breach or threatened breach by the Executive of his covenant,
                  and agrees that the Company shall be entitled to injunctive
                  relief to bar the Executive from such breach or threatened
                  breach in addition to any other remedies which may be
                  available to the Company at law or in equity.

                  18.      Covenant Not to Compete.

                           (a) During Employment Period. During the Employment
                  Period, the Executive shall not, without the prior written
                  consent of the Company, which consent may be withheld at the
                  sole and reasonable discretion of the Company, engage in any
                  other business activity for gain, profit, or other pecuniary
                  advantage (excepting the investment of funds in such form or
                  manner as will not require any services on the part of the
                  Executive in the operation of the affairs of the companies in
                  which such investments are made) or engage in or in any manner
                  be connected or concerned, directly or indirectly, whether as
                  an officer, director, stockholder, partner, owner, employee,
                  creditor, or otherwise, with the operation, management, or
                  conduct of any business that competes with the Business of the
                  Company.

                           (b) Following Termination of Employment Period.
                  Within the two (2) year period immediately following the end
                  of the Employment Period, regardless of the reason therefor,
                  the Executive shall not, without the prior written consent of
                  the Company, which consent may be withheld at the sole
                  discretion of the Company: (A) engage in or in any manner be
                  connected or concerned, directly or indirectly, whether as an
                  officer, director, stockholder, partner, owner, employee,
                  creditor, or otherwise with the operation, management, or
                  conduct of any business similar to the Business being
                  conducted at the time of such termination within a 100-mile
                  radius from Milwaukee, Wisconsin; (B) directly solicit,
                  contact, interfere with, or divert any customer served by the
                  Company for the Business, or any prospective customer
                  identified by or on behalf of the Company, during the
                  Executive's employment with the Company; or (C) directly
                  solicit any employee then employed by the Company or
                  previously employed by the Company within the one year period
                  preceding termination of the Executive's employment with the
                  Company to join the Executive, whether as a partner, agent,
                  employee or otherwise, in any enterprise engaged in a business
                  similar to the Business of the Company being conducted at the
                  time of such termination.

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                           (c) Acknowledgment. The Executive acknowledges that
                  the restrictions set forth in Section 19 are reasonable in
                  scope and essential to the preservation of the Business of the
                  Company and proprietary properties and that the enforcement
                  thereof will not in any manner preclude the Executive, in the
                  event of the Executive's termination of employment with the
                  Company, from becoming gainfully employed in such manner and
                  to such extent as to provide a standard of living for himself,
                  the members of his family, and those dependent upon him of at
                  least the sort and fashion to which he and they have become
                  accustomed and may expect.

                           (d) Severability. The covenants of the Executive
                  contained in Section 19 of this Agreement shall each be
                  construed as an agreement independent of any other provision
                  in this Agreement, and the existence of any claim or cause of
                  action of the Executive against the Company, whether
                  predicated on this Agreement or otherwise, shall not
                  constitute a defense to the enforcement by the Company of such
                  covenants. Both parties hereby expressly agree and contract
                  that it is not the intention of either party to violate any
                  public policy, or statutory or common law, and that if any
                  sentence, paragraph, clause, or combination of the same of
                  this Agreement is in violation of the law, such sentence,
                  paragraph, clause or combination of the same shall be void,
                  and the remainder of such paragraph and this Agreement shall
                  remain binding on the parties to make the covenants of this
                  Agreement binding only to the extent that it may be lawfully
                  done. In the event that any part of any covenant of this
                  Agreement is determined by a court of law to be overly broad
                  thereby making the covenant unenforceable, the parties hereto
                  agree, and it is their desire, that such court shall
                  substitute a judicially enforceable limitation in its place,
                  and that as so modified the covenant shall be binding upon the
                  parties as if originally set forth herein.

                  19.      Arbitration.

                           (a) Subject to the terms of Section 21(h) below, upon
                  presentation of a written claim or claims (collectively
                  "Claims") arising out of or relating to this Agreement, or the
                  breach hereof, by an aggrieved party, the other party shall
                  have thirty (30) days in which to make such inquiries of the
                  aggrieved party and conduct such investigations as it believes
                  reasonably necessary to determine the validity of the Claims.
                  At the end of such period of investigation, the complained of
                  party shall either pay the amount of the Claims or the
                  arbitration proceeding described in Section 20(b) shall be
                  invoked, subject to the terms of Section 20(g) below.

                           (b) In the event that the Claims are not settled by
                  the procedure set forth in Section 20(a), the Claims shall be
                  submitted to arbitration conducted in accordance with the
                  Commercial Arbitration Rules ("Rules") of the American
                  Arbitration Association ("AAA") except as amplified or
                  otherwise varied hereby.

                           (c) The parties shall submit the dispute to the
                  Milwaukee, Wisconsin regional office of the AAA and the situs
                  of the arbitration shall be Milwaukee, Wisconsin.

                           (d) The arbitration shall be conducted by a single
                  arbitrator. The parties shall appoint the single arbitrator to
                  arbitrate the dispute within ten (10) business days of the
                  submission of the dispute. In the absence of agreement as to
                  the identity of the single arbitrator to arbitrate the dispute
                  within such time, the AAA is authorized to appoint an
                  arbitrator in accordance with the rules, except that the
                  arbitrator shall have as his principal place of business the
                  Milwaukee, Wisconsin metropolitan area.

                           (e)      The single arbitrator  selected by AAA shall
                  be an attorney licensed to practice by the State of Wisconsin.

                           (f) Anything in the Rules to the contrary
                  notwithstanding, the arbitration award shall be made in
                  accordance with the following procedure: (i) in the event the
                  dispute involves monetary relief, each party shall, at the
                  commencement of the arbitration hearing, submit an initial
                  statement of the amount each party proposes be selected by the
                  arbitrator as the arbitration award ("Settlement

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                  Amount"). During the course of the arbitration, each party may
                  vary its proposed Settlement Amount. At the end of the
                  arbitration hearing, each party shall submit to the arbitrator
                  its final Settlement Amount ("Final Settlement Amount"), and
                  the arbitrator shall be required to select either one or the
                  other Final Settlement Amounts as the arbitration award
                  without discretion to select any other amount as the award.
                  The arbitration award shall be paid within thirty (30)
                  business days after the award has been made, together with
                  interest from the date of award at the rate of nine percent
                  (9%). Judgment upon the award may be entered in any federal or
                  state court having jurisdiction over the parties; (ii) in the
                  event the dispute involves the interpretation of this
                  Agreement, each party shall submit an initial statement of the
                  interpretation each party proposes be selected by the
                  arbitrator as the arbitration award ("Proposed
                  Interpretation"). During the course of the arbitration, each
                  party may vary its Proposed Interpretation. At the end of the
                  arbitration hearing, each party shall submit to the arbitrator
                  its final Proposed Interpretation, and the arbitrator shall
                  select either one or the other final Proposed Interpretations,
                  or a reasonable alternative, as the arbitration award.
                  Judgment upon the award may be entered in any federal or state
                  court having jurisdiction over the parties.

                           (g) Notwithstanding anything to the contrary
                  contained herein, any matter which pursuant to the terms of
                  this Agreement is to be resolved by the Board or the Executive
                  Committee of the Board in its sole discretion shall be so
                  resolved without arbitration.

                  20.      General Provisions.

                           (a) Goodwill. The Company has invested substantial
                  time and money in the development of its products, services,
                  territories, advertising and marketing thereof, soliciting
                  clients and creating goodwill. By accepting employment with
                  the Company, the Executive acknowledges that the customers are
                  the customers of the Company, and that any goodwill created by
                  the Executive belongs to and shall inure to the benefit of the
                  Company.

                           (b) Notices. Any notice required or permitted
                  hereunder shall be made in writing (i) either by actual
                  delivery of the notice into the hands of the party thereunder
                  entitled, or (ii) by depositing the notice with a nationally
                  recognized overnight delivery service, all shipping costs
                  prepaid and addressed to the party to whom the notice is to be
                  given at the party's respective address set forth below, or
                  such other address as the parties may from time to time
                  designate by written notice as herein provided.
<TABLE>
<S>                                                         <C>
                  As addressed to the Company:              With a copy to:

                  Merge Technologies Incorporated           Shefsky & Froelich Ltd.
                  1126 South 70th Street                    444 North Michigan Avenue
                  Milwaukee, Wisconsin 53214-3151           Suite 2500
                  Attention:  Chief Financial Officer       Chicago, Illinois 60611
                                                            Attention: Mitchell D. Goldsmith, Esq.

                  As addressed to the Executive:

                  Mr. William C. Mortimore
                  S76 W13054 Cambridge Court West
                  Muskego, Wisconsin 53150
</TABLE>

                  The notice shall be deemed to be received on the date of its
                  actual receipt by the party entitled thereto.

                           (c) Amendment and Waiver. No amendment or
                  modification of this Agreement shall be valid or binding upon
                  the Company unless made in writing and signed by an officer of
                  the Company duly authorized by the Board or upon the Executive
                  unless made in writing and signed by him. The waiver by the
                  Company of the breach of any provision of this Agreement by
                  the Executive shall not operate or be construed as a waiver of
                  any subsequent breach by him.

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                           (d) Entire Agreement. This Agreement constitutes the
                  entire Agreement between the parties with respect to the
                  Executive's duties and compensation as an executive of the
                  Company, and there are no representations, warranties,
                  agreements or commitments between the parties hereto with
                  respect to his employment except as set forth herein. No
                  presumption shall be made in favor or against either party
                  based upon who has served as draftsman of this Agreement.

                           (e) Governing Law. This Agreement shall be governed
                  by and construed in accordance with the internal laws (and not
                  the law of conflicts) of the State of Illinois.

                           (f) Severability. If any provision of this Agreement
                  shall, for any reason, be held unenforceable, such provision
                  shall be severed from this Agreement unless, as a result of
                  such severance, the Agreement fails to reflect the basic
                  intent of the parties. If the Agreement continues to reflect
                  the basic intent of the parties, then the invalidity of such
                  specific provision shall not affect the enforceability of any
                  other provision herein, and the remaining provisions shall
                  remain in full force and effect.

                           (g) Assignment. The Executive may not under any
                  circumstances delegate any of his rights and obligations
                  hereunder without first obtaining the prior written consent of
                  the Company. This Agreement and all of the Company's rights
                  and obligations hereunder may be assigned or transferred by
                  it, in whole or in part, to be binding upon and inure to the
                  benefit of any subsidiary or successor of the Company,
                  provided either the successor has a net worth greater than the
                  Company at the time of assignment or the Company remains
                  primarily liable with respect to the obligations so assigned.

                           (h) Costs of Enforcement, Litigation. In the event of
                  any suit or proceeding seeking to enforce the terms,
                  covenants, or conditions of this Agreement, the prevailing
                  party shall, in addition to all other remedies and relief that
                  may be available under this Agreement or applicable law,
                  recover his or its reasonable attorneys' fees and costs as
                  shall be determined and awarded by the court. Notwithstanding
                  anything to the contrary contained in Section 20 above or
                  elsewhere herein any controversy or dispute with respect to
                  the terms of Section 16, 17, 18 or 19 of this Agreement will
                  survive termination of this Agreement and shall be litigated
                  in the state of federal courts of competent jurisdiction
                  situated in Milwaukee, Wisconsin, to which jurisdiction and
                  venue all parties consent.

                           (i) Mitigation. The Executive shall be obligated to
                  mitigate his damages as a result of voluntary or involuntary
                  termination of employment with the Company. Should the
                  Executive be entitled to change in control payments pursuant
                  to Section 11 or severance payments pursuant to Section 15,
                  then, to the extent that during the twelve (12) month period
                  following change in control termination of employment or
                  during the period of time for which severance payments are
                  paid out (i.e., four, five or six months based upon
                  pre-severance tenure), the Executive receives or accrues
                  direct or indirect compensation for the provision of services
                  (whether an employee, consultant, independent contractor or
                  otherwise, either directly or to an entity controlled by or
                  otherwise affiliated with the Executive), then all such
                  compensation shall be credited dollar-for-dollar to reduce the
                  change in control or severance obligation of the Company to
                  the Executive pursuant to the terms of Section 11 or Section
                  15, respectively.

                  [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

                                       33

<PAGE>   9
         IN WITNESS WHEREOF, this Agreement is entered into as of the day and
year first above written.

                         COMPANY:

                         MERGE TECHNOLOGIES INCORPORATED

                         By:       /s/ HYMIE S. NEGIN
                               ----------------------------------
                                   Hymie S. Negin, Chairman
                                   Executive Committee of the Board of Directors

                         EXECUTIVE:

                         By:       /s/ WILLIAM C. MORTIMORE
                                   -------------------------------
                                   WILLIAM C. MORTIMORE

                                       34

<PAGE>   10
                                   EXHIBIT A

                          FORM OF STOCK PURCHASE NOTE

                                       35<PAGE>   1

                              INRANGE TECHNOLOGIES

                                    EXECUTIVE

                         EVA INCENTIVE COMPENSATION PLAN

                                                                 SEPTEMBER, 2000

<PAGE>   2

I.   PURPOSE

The objectives of the Inrange Technologies EVA Executive Incentive Compensation
Plan are to link incentive awards for plan participants to the creation of
investor wealth and to promote a culture of performance and ownership.
Accordingly, the program rewards sustained improvements in investor value.

II.  ELIGIBILITY

Officers and key managers in both line and staff positions who have significant
impact on the achievement of the Company's strategic objectives are eligible to
participate in the Executive EVA Incentive Compensation Plan. Participation for
a given plan year is based on the recommendation of the supervising officer or
unit President and approval by the Chief Executive Officer and/or the
Compensation Committee of the Board of Directors.

Upon approval by the Chief Executive Officer and/or the Compensation Committee,
participation shall be offered to prospective participants in consideration for
the prospective participant's agreement to sign a non-competition and
confidentiality agreement. The terms of the non-competition and confidentiality
agreement shall be on terms acceptable to the Company.

III. DEFINITIONS AND EVA INCENTIVE PLAN PARAMETERS

A. Economic Value Added (EVA):

Improvement in EVA provides the best operating measure of increases in
shareholder wealth. EVA is an estimate of the company's economic profit after
subtracting the cost of all capital (debt and equity) employed in the business.
EVA is the difference between our organization's net operating profits after-tax
(NOPAT) and the charge for capital employed, as follows:

         EVA = NET OPERATING PROFIT AFTER TAXES (NOPAT) - CAPITAL CHARGE
where,
         CAPITAL CHARGE = COST OF CAPITAL X CAPITAL EMPLOYED IN THE BUSINESS

NOPAT is the profit after subtracting cost of sales, operating expenses, taxes
and other adjustments from revenues. Cost of Capital is the required, or
minimum, rate of return necessary to compensate all investors for the capital
they have invested in the business. Capital represents the investment made by
shareholders and lenders in the business (total assets minus current
liabilities).

                                                                          Page 1
<PAGE>   3

B. Expected Improvement (EI):

Expected Improvement (EI) represents the annual EVA improvement, or growth,
required to provide our investors with a competitive, or cost of capital, return
on the market value of their investment. The plan pays a Target Bonus for
achieving Expected Improvement, i.e., employees receive their target cash
compensation when investors receive their target investment return. The Expected
EVA Improvement amounts for Inrange Technologies for 2000 are shown in Appendix
A.

C. Target Bonus:

Target Bonus is the bonus earned for achieving EI. A participant's Target Bonus
is calculated by multiplying his or her year end salary (as of December 31) by
his or her Bonus Class Percent. For example, if year end salary is $75,000 and
Bonus Class Percent is 10%, the Target Bonus is $7,500:

              Year End Salary x Bonus Class Percent = Target Bonus

                              75,000 x 10% = $7,500

D. EVA Interval:

The EVA Interval is the amount of EVA improvement, in excess of EI, needed to
earn each additional multiple of the target bonus. For example, EVA improvement
of one Interval in excess of EI earns a bonus multiple of 2.0, or 1.0 more than
target, while EVA improvement of two Intervals in excess of EI earns a bonus
multiple of 3.0, or 2.0 more than target. The EVA Interval is also the shortfall
in EVA improvement, below EI, that results in a zero bonus. The EVA Interval
amounts for all INRANGE business units appear in Appendix A.

E. Bonus Multiple:

The Bonus Multiple is determined by (1) the difference between actual and
expected EVA improvement and (2) the EVA Interval:

              BONUS MULTIPLE = (1+[((DELTA)EVA - EI)/EVA INTERVAL])

When the EVA improvement equals EI, the Bonus Multiple is 1.0. When the EVA
improvement exceeds EI, the Bonus Multiple is greater than 1.0 and when the EVA
improvement falls short of EI, the Bonus multiple is less than 1.0.

                                                                          Page 2
<PAGE>   4

F. Declared Bonus:

The Declared Bonus, which is determined at the end of the Bonus Plan year, is
the amount of bonus earned by a participant as a result of EVA performance
during the year. There is no limit to how large or small bonuses can be. The
Declared Bonus can even be a negative amount as a result of a negative change in
Economic Value. The annual Declared Bonus a participant achieves may be stated
as:

                 DECLARED BONUS = TARGET BONUS * BONUS MULTIPLE
       DECLARED BONUS = TARGET BONUS* (1+ [(DELTA)EVA - EI)/EVA INTERVAL])

An easy and practical way for a plan participant to determine his or her
Declared Bonus is to multiply Target Bonus times the Bonus Multiple.

The Declared Bonus can also be expressed as:

 DECLARED BONUS = TARGET BONUS + A SHARE OF ((DELTA)EVA - EXPECTED IMPROVEMENT)
         DECLARED BONUS = TARGET BONUS + [(TARGET BONUS/EVA INTERVAL) *
                               ((DELTA)EVA - EI)]

The ratio [Target Bonus/EVA Interval] is your share of EVA improvement in excess
of EI.

G. Bonus Bank:

The Bonus Bank is an essential component in protecting and building investor
value. All Declared Bonus amounts flow through the Bonus Bank, to promote a long
term horizon and ensure that only sustainable improvements are rewarded. Thus,
the Bonus Bank maintains a cumulative relationship between bonuses paid and EVA
improvement over time.

Each participant has his or her own individual Bonus Bank account. If, after the
Declared Bonus is determined, the prior year balance plus the Declared Bonus is
less than Target Bonus, the entire balance is paid.

When the balance exceeds Target Bonus, the bonus available for payment is equal
to Target Bonus plus one-third of any remaining balance. The other two-thirds is
deferred and ultimately paid out only if the performance is sustained. If EVA
falls by enough, a negative amount is banked. When a negative balance exists, it
must be paid off through future EVA improvements before any bonus is paid,
maintaining the sharing relationship between cumulative EVA achievement and
cumulative bonuses. The Bonus Award flow through the Bonus Bank is depicted
below.

<TABLE>
<S>                              <C>                           <C>
      ----------------            ------------                  -----------------
     |                |          |            |                |                 |
     | Declared Bonus |--------->| Bonus Bank |--------------->| Available Bonus |
     |                |          |            |                |                 |
      ----------------            ------------                  -----------------

        Target Bonus            Beginning Balance          Up to Target Bonus plus one
        + a % of EVA                    +                  third of remaining balance
     above or below EI            Declared Bonus       (Depending on Personal Performance)
</TABLE>

                                                                          Page 3
<PAGE>   5

IV.  PERSONAL PERFORMANCE

A. Determining Personal Performance Award Amounts

The EVA Incentive Plan award for Personal Performance can be earned only after
improving EVA. Thus the Personal Performance Award is based on a "carve out"
portion of the Available Bonus. The Personal Performance carve-out for plan
participants is 20% of the total annual bonus available to be paid. Thus, of the
award payment amount available in any year, 80% is paid BASED ON BUSINESS
PERFORMANCE and 20% is paid based on Personal Performance, depicted for a
Division President as follows:

<TABLE>
<S>                               <C>             <C>           <C>              <C>                 <C>
 --------------
|   Declared   |------------
|     Bonus    |        20% |     ----------       -------       -----------      --------------      --------
| Consolidated |            |    | Declared |     | Bonus |     | Available |    | 80% Business |    | Bonus  |
 --------------             |--->|  Bonus   |---->| Bank  |---->|   Bonus   |--->| 20% Personal |--->| Award  |
                            |    |          |     |       |     |           |    |              |    | Earned |
 --------------             |     ----------       -------       -----------      --------------      --------
|   Declared   |            |
|     Bonus    |        80% |
|   Division   |------------
 --------------
</TABLE>

Any funds remaining from Personal Performance Awards that are not distributed
are forfeited.

                                                                          Page 4
<PAGE>   6

B. Measuring Personal Performance

At year end, the immediate supervisor shall evaluate each participant's
performance TO DETERMINE WHAT HIS OR HER DISCRETIONARY BONUS PERCENTAGE SHALL
BE. The evaluation shall be based on the participant's leadership skills
focusing on the INRANGE Leadership Principles, the performance of the individual
in carrying out his/her primary functional assignment, and the overall impact,
contribution and achievement of the participant.

          Personal Performance                           Amount of Available 20%
           Achievement Rating                                    Earned
          --------------------                           -----------------------

        -  Requires significant improvement.                    up to 5%
        -  Inconsistent; occasional good performance,
            sometimes falls short.                              up to 10%
        -  Good commitment and good, consistent
            results.  On par performance.                       up to 15%
        -  High achiever; recognized by others as
            having high impact and strong leadership
            skills.                                             up to 20%

C. Bonus Award and Bank Example

The chart below depicts an example participant's EVA Bonus Award and Bank
through 3 years. For simplification, Target Bonus is set at $10,000 in all three
years.

  -----------------------------------------------------------------------------
                                Inrange Technologies

                            Bonus Award and Bank Example

                                                  1999      2000     2001
                                                 ------   -------  -------

        A. Target Bonus                          10,000    10,000   10,000

        B. Bonus Multiple                          2.50      1.80     1.30
                                                 ------   -------  -------
        C. Declared Bonus               A x B    25,000    18,000   13,000

        D. Beg. Bank Balance                          0    10,000   12,000
                                                 ------   -------  -------
        E. Beg Bank Balance +           C + D    25,000    28,000   25,000
           Declared Bonus

        F. Pay Target Bonus (or             A    10,000    10,000   10,000
           available if less)

        G. 1/3 of Bank Balance      (E - F)/3     5,000     6,000    5,000
                                                 ------   -------  -------
        H. Available Bonus for          F + G    15,000    16,000   15,000
           performance

        I. Company Performance Award      80%    12,000    12,800   12,000

        J. Personal Performance Award     15%     2,250     2,400    2,250
                                                 ------   -------  -------
        K. Award                        I + J    14,250    15,200   14,250

        L. Ending Bank Balance          E - H    10,000    12,000   10,000
  -----------------------------------------------------------------------------

                                                                          Page 5
<PAGE>   7

V.   ADMINISTRATIVE MATTERS

The following guidelines have been established to define how the issues
addressed below shall be dealt with under the plan. It is the responsibility of
the CEO and the Compensation Committee of the Board of Directors to:

     1.   Interpret the guidelines in their application.
     2.   Establish additional guidelines not specifically addressed below.
     3.   Change, amend, or alter any of the guidelines as necessary to achieve
          the objectives of the plan.

Any decision rendered by the CEO and/or the Compensation Committee regarding any
aspect of the plan is final. Except where specifically authorized by the
Compensation Committee or the CEO, no one is authorized to act in any manner
that is contrary to the plan itself or to these guidelines.

1.   TRANSFERS: A Participant who transfers from one business unit to another
     shall have his or her Bonus Bank transferred to the new unit. If a
     participant works part of the year in Division A and part of the year in
     Division B, the participant's Declared Bonus shall be the sum of a
     pro-rated bonus based on Division A performance and a pro-rated bonus based
     on Division B performance:

                                Declared Bonus =

             Target Bonus * Div A Bonus Multiple * (Div A Months/12)
                                        +
            Target Bonus * Div B Bonus Multiple * (Div B Months/12)]

     The pro-rated bonuses shall be based on the Divisions' full year Bonus
     Multiples, participant's Target Bonus for the year, and the time spent in
     each Division.

2.   DEATH: If a participant dies during the year, the participant's Declared
     Bonus shall be a pro-rated bonus based on the number of months worked
     during the year:

            Target Bonus * Unit Bonus Multiple * (Months Worked/12)]

     The Bonus Award Earned shall be calculated based on the Declared Bonus, the
     Beginning Bonus Bank balance and the participant's Personal Performance
     Achievement Rating as provided in Section V. The Bonus Award Earned and the
     Ending Bonus Bank Balance, if positive, shall be paid to the participant's
     designated company life insurance beneficiaries at the normal bonus payment
     date after the end of the fiscal year.

                                                                          Page 6
<PAGE>   8

3.   RETIREMENT AND DISABILITY: When a participant retires (the participant must
     be eligible to retire under the applicable pension plan and must have at
     least 3 years of service with Inrange since the IPO date of September 22,
     2000) or when a participant becomes temporarily or permanently disabled (as
     determined by the Company), participant's Declared Bonus shall be a
     pro-rated bonus based on the number of months worked during the year:

             Target Bonus * Unit Bonus Multiple * (Months Worked/12)

     Nothing herein shall be interpreted, however, as amending or otherwise
     changing the vesting requirement in any other company pension or benefit
     plans.

     The Bonus Award Earned shall be calculated based on the Declared Bonus, the
     Beginning Bonus Bank Balance and the participant's Personal Performance
     Achievement Rating as provided in Section V. The Bonus Award Earned, if
     positive, shall be paid to the participant at the normal bonus payment date
     after the end of the fiscal year. When a participant's temporary disability
     carries over into a subsequent fiscal year, the participant's Declared
     Bonus for that year shall also be calculated using the formula above.

     If a participant terminates before eligibility for retirement benefits
     under the applicable pension plan, or retires with eligibility for
     retirement benefits but before achieving at least 3 years of service with
     Inrange since the IPO date of September 22, 2000, such termination shall
     result in forfeiture of both the Bonus Bank and the bonus payment for the
     year in which the termination occurs.

     For participants who retire or become permanently disabled, the Ending
     Bonus Bank Balance, if positive, shall be paid to the participant, up to a
     maximum of 6 times the participant's final annual Target Bonus, at the
     normal bonus payment date after the end of the fiscal year. For
     participants who are temporarily disabled, the Ending Bonus Bank Balance
     remains fully at risk and is not paid out.

     For participants who retire or become permanently disabled, the Ending
     Bonus Bank Balance in excess of 6 times the participant's annual Target
     Bonus (the "Excess Bonus Bank Balance") shall be at risk and adjusted at
     the end of the first and second post-retirement (or post-permanent
     disability) fiscal years by the addition of a Declared Bonus. The Declared
     Bonus for the first and second post-retirement (or post-disability) fiscal
     years shall be equal to:

                    Target Bonus * [Unit Bonus Multiple - 1]

     50% of the Excess Bonus Bank Balance, if positive, shall be paid to the
     participant at the normal bonus payment time after the end of first
     post-retirement (or post-permanent disability) fiscal year, and the
     remainder of the Excess Bonus Bank Balance shall be paid at the normal
     bonus payment time after the end of the second post-retirement (or
     post-disability) fiscal year.

                                                                          Page 7
<PAGE>   9

     The example below is based on the following data:

         ---------------------------------------------------------------
          Target Bonus                                          $20,000
          Beginning Bonus Bank                                 $400,000
          Retirement Date                                       July 31
          Unit Bonus Multiple - Retirement Year                    1.45
          Unit Bonus Multiple - 1st Post Retirement Year           2.00
          Unit Bonus Multiple - 2nd Post Retirement Year             .7
         ---------------------------------------------------------------

     The participant's Declared Bonus for his/her retirement year is:

            Target Bonus * Unit Bonus Multiple * (Months Worked/12)]

                        $20,000 * 1.45 * (7/12) = $16,917

     The Declared Bonus increases the Bonus Bank Balance to $416,917, and makes
     the Available Bonus $152,306. After deducting the Available Bonus, the
     Ending Bank Balance is $264,611 = $416,917 - $152,306. The Ending Bonus
     Bank Balance is 13.2 times the participant's target bonus and exceeds 6x
     target bonus by $144,611. At the normal bonus payment date after the end of
     the fiscal year, the participant receives his/her Bonus Award Earned
     ($152,306, assuming the highest Personal Performance Achievement Rating)
     and the Ending Bonus Bank Balance, up to a maximum of six times target
     bonus, or $120,000. The total payment is $272,306, and leaves an Excess
     Bonus Bank Balance of $144,611.

     The Declared Bonus for the first post-retirement year is:

                    Target Bonus * [Unit Bonus Multiple - 1]

                         $20,000 * [2.00 - 1] = $20,000

     This Declared Bonus is added to the Excess Bonus Bank Balance, giving a new
     Bank Balance of $164,611 (= $144,611 + $20,000). 50% of this Bank Balance,
     or $82,306, is paid out at the normal bonus payment date following the end
     of the first post-retirement year, leaving an Excess Bonus Bank Balance of
     $82,306.

     The Declared Bonus for the second post-retirement year is:

                    Target Bonus * [Unit Bonus Multiple - 1]

                          $20,000 * [0.7 - 1] = -$6,000

     This Declared Bonus is added to the Excess Bonus Bank Balance, giving a new
     Bank Balance of $76,306 (= $82,306 - $6,000). This Bank Balance is paid out
     in full at the normal bonus payment date following the end of the first
     post-retirement year.

                                                                          Page 8
<PAGE>   10

4.   ORGANIZATION RESTRUCTURING: When a participant's position is eliminated and
     the participant is terminated as a part of a business reorganization or
     organizational restructuring (as determined by the CEO or the Compensation
     Committee), participant's Declared Bonus shall be a pro-rated bonus based
     on the number of months worked during the year:

             Target Bonus * Unit Bonus Multiple * (Months Worked/12)

     The Bonus Award Earned shall be calculated based on the Declared Bonus, the
     Beginning Bonus Bank balance and the participant's Personal Performance
     Achievement Rating as provided in Section V. The Bonus Award Earned and the
     Ending Bonus Bank Balance, if positive, shall be paid to the participant at
     the normal bonus payment date after the end of the fiscal year.

5.   CHANGE FROM UNCAPPED TO CAPPED PLAN: When a participant is moved from the
     uncapped EVA Executive Incentive Compensation Plan to a capped EVA bonus
     plan, he/she shall retain his/her bonus bank and receive a Bonus Award
     Earned each year from the uncapped plan until his/her bonus bank is
     exhausted, provided he/she remains employed by the Company. For the year in
     which the participant is moved, participant's Declared Bonus shall be a
     pro-rated bonus based on the number of months in the uncapped plan:

         Target Bonus * Unit Bonus Multiple * (Uncapped Plan Months/12)

     The Bonus Award Earned shall be calculated based on the Declared Bonus, the
     Beginning Bonus Bank balance, the participant's last annual Target Bonus in
     the uncapped plan and the participant's Personal Performance Achievement
     Rating as provided in Section V. In subsequent years, the Bonus Award
     Earned shall be calculated based on a Declared Bonus of $0, the Beginning
     Bonus Bank Balance, the participant's last Target Bonus in the uncapped
     plan and the participant's Personal Performance Achievement Rating as
     provided in Section V.

     The following example is for a participant who has a $60,000 bonus bank
     when he/she leaves the uncapped plan and whose last Target Bonus was
     $15,000. Year 1 is the participant's first full year in the capped plan.

         ================================================================
                                           Year 1     Year 2     Year 3
         ----------------------------------------------------------------
         Beginning Bonus Bank              $60,000    $30,000    $10,000
         Declared Bonus                         $0         $0         $0
         Target Bonus                      $15,000    $15,000    $15,000
         Available Bonus                   $30,000    $20,000    $10,000
         Personal Performance Rating          Good       Good       Good
         Bonus Award Earned                $28,500    $19,000     $9,500
         Ending Bonus Bank                 $30,000    $10,000         $0
         ================================================================

                                                                          Page 9
<PAGE>   11

     The Available Bonus in each year is equal to the Beginning Bonus Bank, up
     to the amount of the participant's last Target Bonus in the uncapped plan,
     plus 1/3 of the Bonus Bank Balance in excess of the Target Bonus. In Year 1
     (i.e., the first year in the capped plan), the Available Bonus is $15,000 +
     1/3 * ($60,000 - $15,000) = $15,000 + $15,000 = $30,000. The Bonus Award
     Earned is 95% of the Available Bonus each year based on a Personal
     Performance Achievement Rating of "good".

6.   RESIGNATIONS AND TERMINATION: Voluntary termination of employment with
     INRANGE and termination for any reason other than 1) loss of position due
     to business reorganization or organizational restructuring, 2) death or 3)
     a qualified retirement under INRANGE benefit plans shall result in
     forfeiture of both the Bonus Bank and the bonus payment for the year in
     which the termination or resignation occurred. Participants who are
     employed on the last day of the fiscal year, but terminate voluntarily (or
     for any reason other than those just enumerated) prior to the normal bonus
     payment date, shall receive any Bonus Award Earned for the fiscal year, but
     shall forfeit their Ending Bonus Bank.

7.   Sale of an INRANGE Business Unit: When one of the business units of the
     Corporation is sold, participant's Declared Bonus shall be a partial year
     bonus unless the sale agreement includes an "earn-out" provision. The
     partial year Declared Bonus (in the absence of an "earn-out" provision)
     shall be based on a pro-rated Target Bonus, the EVA improvement for the
     partial year ending on the closing date of the sale, and a pro-rated
     Expected Improvement:

                     Target Bonus * (Days thru Closing/365)
                                        +
                         [Target Bonus/EVA Interval] *
          [(DELTA)EVA              - (EI * (Days thru Closing/365))]
                     Thru Closing

     The EVA improvement for the partial year ending on the closing date of the
     sale shall be equal to the EVA for the partial year ending on the closing
     date minus prior year EVA for the partial year ending at the month end
     closest to the closing date. The Bonus Award Earned shall be calculated
     based on the Declared Bonus, the Beginning Bonus Bank balance and the
     participant's Personal Performance Achievement Rating as provided in
     Section V. The Bonus Award Earned and the Ending Bonus Bank Balance, if
     positive, shall be paid to the participant at the normal bonus payment date
     after the end of the fiscal year. If the participant is not actively
     employed with INRANGE through the closing date of the sale, the participant
     shall not be entitled to any Bonus Award or Bonus Bank payment.

     If the sale agreement includes an "earn-out" provision, the Company shall
     have no obligation to pay bonuses based on partial year performance and
     shall have the right to negotiate with the buyer the payment of bonuses
     based on full year performance. If the sale agreement includes an
     "earn-out" provision and bonuses are paid based on full year performance, a
     participant shall not be entitled to any Bonus Award or Bonus Bank

                                                                         Page 10
<PAGE>   12

     payment unless the participant is actively employed by the buyer at the end
     of the fiscal year.

8.   NON-COMPETITION AND NON-DISCLOSURE: For purposes of this Bonus Plan, if a
     plan participant leaves the company with rights to future payments from the
     plan, then until those payments are distributed to the participant, he or
     she shall not directly or indirectly own, manage, operate, join, control,
     become employed by or participate in the management, operation or control
     of, any business which is a competitor, customer, or supplier of Inrange
     Technologies, or any subsidiary or division thereof without the specific
     consent of the Corporation; except as a shareholder of a publicly-held
     competitor, customer or supplier corporation where such ownership does not
     exceed one percent (1%) of the total shares outstanding.

     Additionally, the participant shall not disclose any confidential
     information pertaining to the business of the Corporation, including the
     location and identity of its customers and suppliers, its costs of
     operation, the pricing of its products and services, its operating
     practices and its product details without the express written approval of
     the Corporation.

     The failure of a participant or former participant to comply with the
     provisions of this Section VI. 6 shall result in forfeiture of any payments
     that might otherwise be due because of his or her prior participation in
     the plan.

9.   CHANGE-OF-CONTROL: In the event of a change-of-control of Inrange
     Technologies (defined in Appendix B) the full Bonus Bank shall be paid as
     of the date the change-of-control occurs. Additionally, the
     change-of-control date shall be treated as if it were the end of that bonus
     plan year, EVA performance shall be measured, and the participant shall be
     paid the higher of that full year's target bonus or the actual earned
     bonus.

10.  NEGATIVE BALANCES: At year-end when the Business Unit's annual EVA
     Improvement is calculated, each participant's Declared Bonus is then
     determined. The Declared Bonus, whether a positive or negative amount,
     flows through each participant's Bonus Bank. A negative Declared Bonus has
     the effect of reducing the amount of the Beginning Bank Balance. If the
     Year-ending Bank Balance (the Beginning Bank Balance adjusted by that
     year's Declared Bonus) is positive, up to Target Bonus plus one third of
     the balance above Target Bonus is available to be paid out. Residual
     amounts, including negative Bank Balances, are carried forward to be
     credited or debited against future Declared Bonus amounts. Negative Bank
     Balances shall not be held as claims against participants who leave the
     payroll for any reason.

11.  ADMINISTRATION: The Plan shall be administered by the Compensation
     Committee of the Board of Directors.

12.  PLAN CONTINUATION: The Board may at any time amend, suspend, discontinue or
     terminate the Plan, provided, however, that no amendment shall, without the
     consent of a participant, alter or impair any award which has been
     previously declared or granted to a participant.

                                                                         Page 11
<PAGE>   13

13.  NO RIGHT OF ASSIGNMENT: Except as expressly provided herein, no right or
     benefit under the Plan shall be subject to anticipation, alienation, sale,
     assignment, pledge, encumbrance or charge. No right or benefit hereunder
     shall in any manner be liable for or subject to the debts, contracts,
     liabilities or torts of the person entitled to such right or benefit.

14.  NO GUARANTEE: Nothing in the Plan shall be construed to give any employee
     of the Company any right to be granted any award other than at the
     Compensation Committee's sole discretion, to limit the right of the Company
     to terminate the employment of any participant at any time, or to be
     evident of any agreement or understanding, express or implied, of a
     participant's right to continued employment.

                                                                         Page 12
<PAGE>   14
                                   APPENDIX B

                    CHANGE OF CONTROL OF INRANGE TECHNOLOGIES

A "Change of Control" shall be deemed to have occurred if:

     (a)  Any "Person" (as defined below), excluding for this purpose Inrange
          Technologies (the Company) or any subsidiary of the Company, any
          employee benefit plan of the Company or of any subsidiary of the
          Company, or any entity organized, appointed or established for or
          pursuant to the terms of any such plan which acquires beneficial
          ownership of common shares of the Company, is or becomes the
          "Beneficial Owner" (as defined below) of twenty percent (50%) or more
          of the common shares of the Company then outstanding; provided,
          however, that no Change of Control shall be deemed to have occurred as
          the result of an acquisition of common shares of the Company by the
          Company which, by reducing the number of shares outstanding, increases
          the proportionate beneficial ownership interest of any Person to
          twenty percent (50%) or more of the common shares of the Company then
          outstanding, but any subsequent increase in the beneficial ownership
          interest of such a Person in common shares of the Company shall be
          deemed a Change of Control; and provided further that if the Board of
          Directors of the Company determines in good faith that a Person who
          has become the Beneficial Owner of common shares of the Company
          representing twenty percent (50%) or more of the common shares of the
          Company then outstanding has inadvertently reached that level of
          ownership interest, and if such Person divests as promptly as
          practicable a sufficient number of shares of the Company so that the
          Person no longer has a beneficial ownership interest in twenty percent
          (50%) or more of the common shares of the Company then outstanding,
          then no Change of Control shall be deemed to have occurred. For
          purposes of this paragraph (a), the following terms shall have the
          meanings set forth below:

          (i)  "Person" shall mean any individual, firm, limited liability
               company, corporation or other entity, and shall include any
               successor (by merger or otherwise) of any such entity.

          (ii) "Affiliate" and "Associate" shall have the respective meanings
               ascribed to such terms in Rule 12b-2 of the General Rules and
               Regulations under the Securities Exchange Act of 1934, as amended
               (the "Exchange Act").

<PAGE>   15

         (iii) A Person shall be deemed the "Beneficial Owner" of and shall be
               deemed to "beneficially own" any securities:

               (A)  which such Person or any of such Person's Affiliates or
                    Associates beneficially owns, directly or indirectly
                    (determined as provided in Rule 13d-3 under the Exchange
                    Act);

               (B)  which such Person or any of such Person's Affiliates or
                    Associates has (1) the right to acquire (whether such right
                    is exercisable immediately or only after the passage of
                    time) pursuant to any agreement, arrangement or
                    understanding (other than customary agreements with and
                    between underwriters and selling group members with respect
                    to a bona fide public offering of securities), or upon the
                    exercise of conversion rights, exchange rights, rights
                    (other than rights under the Company's Rights Agreement
                    dated June 25, 1996 with The Bank of New York, as amended),
                    warrants or options, or otherwise; provided, however, that a
                    Person shall not be deemed the Beneficial Owner of, or to
                    beneficially own, securities tendered pursuant to a tender
                    or exchange offer made by or on behalf of such Person or any
                    of such Person's Affiliates or Associates until such
                    tendered securities are accepted for purchase or exchange;
                    or (2) the right to vote pursuant to any agreement,
                    arrangement or understanding; provided, however, that a
                    Person shall not be deemed the Beneficial Owner of, or to
                    beneficially own, any security if the agreement, arrangement
                    or understanding to vote such security (a) arises solely
                    from a revocable proxy or consent given to such Person in
                    response to a public proxy or consent solicitation made
                    pursuant to, and in accordance with, the applicable rules
                    and regulations promulgated under the Exchange Act and (b)
                    is not also then reportable on Schedule 13D under the
                    Exchange Act (or any comparable or successor report); or

               (C)  which are beneficially owned, directly or indirectly, by any
                    other Person with which such Person or any of such Person's
                    Affiliates or Associates has any agreement, arrangement or
                    understanding (other than customary agreements with and
                    between underwriters and selling group members with respect
                    to a bona fide public offering of securities) for the
                    purpose of acquiring, holding, voting (except to the extent
                    contemplated by the proviso to subparagraph (a)(iii)(B)(2),
                    above) or disposing of any securities of the Company.

<PAGE>   16

                    Notwithstanding anything in this definition of Beneficial
                    Ownership to the contrary, the phrase "then outstanding,"
                    when used with reference to a Person's beneficial ownership
                    of securities of the Company, shall mean the number of such
                    securities then issued and outstanding together with the
                    number of such securities not then actually issued and
                    outstanding which such Person would be deemed to own
                    beneficially hereunder.

          (b)  During any period of two (2) consecutive years, individuals who
               at the beginning of such two-year period constitute the Board of
               Directors of the Company and any new director or directors
               (except for any director designated by a person who has entered
               into an agreement with the Company to effect a transaction
               described in paragraph (a), above, or paragraph (c), below) whose
               election by the Board or nomination for election by the Company's
               shareholders was approved by a vote of at least two-thirds of the
               directors then still in office who either were directors at the
               beginning of the period or whose election or nomination for
               election was previously so approved, cease for any reason to
               constitute at least a majority of the Board; or

          (c)  Approval by the shareholders of (or if such approval is not
               required, the consummation of) (i) a plan of complete liquidation
               of the Company, (ii) an agreement for the sale or disposition of
               the Company or all or substantially all of the Company's assets,
               (iii) a plan of merger or consolidation of the Company with any
               other corporation, or (iv) a similar transaction or series of
               transactions involving the Company (any transaction described in
               parts (i) through (iv) of this paragraph (c) being referred to as
               a "Business Combination"), in each case unless after such a
               Business Combination the shareholders of the Company immediately
               prior to the Business Combination continue to own at least eighty
               percent (80%) of the voting securities of the new (or continued)
               entity immediately after such Business Combination, in
               substantially the same proportion as their ownership of the
               Company immediately prior to such Business Combination.

A "Change of Control" shall not include any transaction described in paragraph
(a) or (c), above, where, in connection with such transaction, a participant
and/or any party acting in concert with that participant shall substantially
increase their, his or its, as the case may be, ownership interest in the
Company or a successor to the Company (other than through conversion of prior
ownership interests in the Company and/or through equity awards received
entirely as compensation for past or future personal services).

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