Document:

Exhibit
10.1

 

 

ASSET PURCHASE AGREEMENT

 

AND PLAN OF REORGANIZATION

 

among:

 

SOL LOGIC, INC.,

a California corporation;

 

FRANK MITCHELL,

a Shareholder of Sol Logic, Inc.;

 

WINK JONES,

as the Seller Representative;

 

and

 

IMAGEWARE SYSTEMS, INC.,

a Delaware corporation

 

 

Dated as of December 19, 2007

 

 

 

 

ASSET PURCHASE AGREEMENT AND PLAN OF REORGANIZATION

 

THIS ASSET PURCHASE
AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of December 19, 2007, by and among: SOL LOGIC, INC., a California corporation (the “Seller”); Frank Mitchell, an
individual and a shareholder of the Seller (“Mitchell”);
Wink Jones, in his capacity as the representative of the shareholders of the
Seller; and IMAGEWARE SYSTEMS, INC., a
Delaware corporation (the “Purchaser”).
Capitalized terms used herein and not otherwise defined herein shall have the
meanings set forth in EXHIBIT A
attached hereto.

 

RECITALS

 

A.                                    The Seller wishes to provide for the sale of
substantially all of the assets of the Seller to the Purchaser for the
consideration and on the terms set forth in this Agreement.

 

B.                                     In connection with such sale, certain of the
parties are entering into the other agreements contemplated herein.

 

AGREEMENT

 

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

 

1.                                      SALE OF ASSETS; RELATED
TRANSACTIONS.

 

1.1                               Sale of Assets. At the Closing (as defined in Section 1.8),
the Seller shall sell, assign, transfer, convey and deliver to the Purchaser,
and the Purchaser shall purchase and acquire from the Seller, all right, title
and interest of the Seller in, and good and valid title to, the Assets, free
and clear of any Encumbrances, on the terms and subject to the conditions set
forth in this Agreement. For purposes of this Agreement, “Assets”
shall mean and include: (a) all of the properties, rights, interests and
other tangible and intangible assets of the Seller (wherever located and
whether or not required to be reflected on a balance sheet prepared in
accordance with GAAP); and (b) any other assets that are owned by any of
the Shareholders or any other Related Party and that are used in or needed for
the conduct of, or are useful in connection with, the business of the Seller; provided, however, that the Assets shall not include any
Excluded Assets. Without limiting the generality of the foregoing, the Assets
shall include:

 

(a)                                  all accounts receivable, notes receivable and
other receivables of the Seller that arise after September 30, 2007;

 

(b)                                  all inventories and work-in-progress of the
Seller, and all rights to collect from customers (and to retain) all fees and
other amounts payable, or that may become payable, to the Seller with respect
to services performed for any Person by or on behalf of the Seller at or prior
to the Closing (including those identified in Part 2.9 of the Disclosure
Schedule);

 

(c)                                  all equipment, materials, prototypes, tools,
supplies, furniture, fixtures, improvements and other tangible assets of the
Seller (including the tangible assets identified in Part 2.10 of the
Disclosure Schedule);

 

(d)                                  all advertising and promotional materials
possessed by the Seller;

 

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(e)                                  all Intellectual Property and Intellectual
Property Rights and related goodwill of the Seller (including the right to use
the name “Sol Logic, Inc.”, “Unity”, “Mediator”, “Collab ID” or “Remote
Collab ID”, and any variations thereof, the “sollogic.com” domain name and the
Intellectual Property and Intellectual Property Rights identified in Part 2.12
of the Disclosure Schedule);

 

(f)                                    all rights of the Seller under the Seller
Contracts set forth on Part 1.1(f) of the Disclosure Schedule;

 

(g)                                 all Governmental Authorizations held by the
Seller (including the Governmental Authorizations identified in Part 2.16
of the Disclosure Schedule);

 

(h)                                 all claims (including claims for past
infringement or misappropriation of Intellectual Property or Intellectual
Property Rights) and causes of action of the Seller against other Persons
(regardless of whether or not such claims and causes of action have been
asserted by the Seller), and all rights of indemnity, warranty rights, rights
of contribution, rights to refunds, rights of reimbursement and other rights of
recovery possessed by the Seller (regardless of whether such rights are
currently exercisable);

 

(i)                                    all insurance benefits, including rights and
proceeds, arising from or relating to the Assets or the Assumed Liabilities
prior to the Closing, unless expended in accordance with this Agreement;

 

(j)                                    all claims of the Seller against third parties
relating to any assets sold, assigned, transferred, conveyed or delivered
pursuant to this Section 1.1, whether choate or inchoate, known or
unknown, contingent or noncontingent, including all such claims listed in Part 1.1(k) of
the Disclosure Schedule; and

 

(k)                                all books, records, files and data of the
Seller, and all goodwill, relating to the assets identified in the second
sentence of Section 1.1 and Sections 1.1(a) through (j).

 

1.2                               Excluded Assets. Notwithstanding anything herein to the
contrary, from and after the Closing, the Seller shall retain all of its
existing right, title and interest in and to, and there shall be excluded from
the sale, conveyance, assignment or transfer to the Purchaser hereunder, and
the Assets shall not include, only the following assets of the Seller
(collectively, the “Excluded Assets”):

 

                                                (a)                                  cash on hand or in banks and cash equivalents
of the Seller; and

 

                                                (b)                                  a 2006 FJ Cruiser owned by Seller.

 

1.3                               Assumption of Liabilities. Except as otherwise specifically set forth
in Section 1.4 and subject to the conditions set forth herein, at the
Closing, the Purchaser agrees to assume only those Liabilities of the Seller
set forth below (the “Assumed Liabilities”):

 

(a)                                  all Liabilities under the Seller Contracts
set forth on Part 1.1(f) of the Disclosure Schedule solely to the
extent arising out of or relating to events or conditions, occurring after the
Closing, but only to the extent such Liabilities (i) do not arise from or
relate to any Breach by the Seller of any provision of any of such Contracts, (ii) do
not arise from or relate to any event, circumstance or condition occurring or
existing at or prior to the Closing that, with notice or lapse of time or both,
would constitute or result in a Breach of any of such Contracts, and (iii) are
ascertainable (in nature and amount) solely by reference to the express terms
of such Contracts; and

 

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(b)                                  all Liabilities with respect to the Assets to
the extent relating to the operation or conduct of the Purchaser’s business
after the Closing, but only to the extent such Liabilities do not arise from or
relate to any event, circumstance or condition occurring or existing at or
prior to the Closing.

 

1.4                               Excluded Liabilities. Notwithstanding anything herein to the
contrary, the Purchaser shall not assume or in any way become liable for any
Liability of the Seller, of any nature whatsoever, other than the Assumed
Liabilities (all such Liabilities, the “Excluded Liabilities”),
and all such Excluded Liabilities shall remain the sole responsibility of the
Seller and shall be retained, paid, performed and discharged solely by the
Seller. Without limiting the generality of the foregoing, Excluded Liabilities
shall include:

 

(a)                                  any Liability of any Person except, with
respect to the Seller only, the Assumed Liabilities;

 

(b)                                  any Liability of the Seller arising out of or
relating to the execution, delivery or performance of any of the Transactional
Agreements (including the fees and expenses of the Seller’s legal, accounting,
financial and other advisors relating to the Transactions);

 

(c)                                  any Liability of the Seller for any fees,
costs or expenses of the type referred to in Section 6.4(a);

 

(d)                                  any Liability of the Seller arising from or
relating to any action taken or services provided by the Seller, or any failure
on the part of the Seller to take any action, at any time after the Closing;

 

(e)                                  any Liability of the Seller arising from or
relating to (x) any services performed by the Seller for any customer, or (y) any
claim or Proceeding against the Seller;

 

(f)                                    any Liability of the Seller for the payment
of any Tax, including, but not limited to, (A) any Taxes arising as a
result of the Seller’s operation of its business or ownership of the Assets prior
to the Closing, (B) any Taxes that will arise as a result of the sale of
the Assets pursuant to this Agreement and (C) any deferred Taxes of any
nature;

 

(g)                                 any Liability of the Seller to any employee
or former employee of the Seller under or with respect to any Seller Employee
Plan, profit sharing plan or dental plan, severance pay, employment agreement,
whether or not written, between the Seller and any Person, or any claim of an
unfair labor practice, or any claim under any state unemployment compensation
or worker’s compensation law or regulation or under any federal or state
employment discrimination law or regulation, or any claim related to payroll,
vacation, sick leave, worker’s compensation, unemployment benefits or
compensation or employee expenses (including travel) that is based on acts or
omissions of Seller that occurred at, prior to, or after the Closing;

 

(h)                                 any Liability of the Seller to any Related
Party;

 

(i)                                    any Liability under any Seller Contract set
forth on Part 1.1(f) of the Disclosure Schedule, if the Seller shall
not have obtained prior to the Closing, any Consent required to be obtained
from any Person with respect to the assignment or transfer to the Purchaser of
any rights or obligations under such Seller Contracts; provided, however, upon
obtaining such Consents, Purchaser shall assume the Liabilities under such
Seller Contracts pursuant to Section 1.3(a) above;

 

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(j)                                    any Liability under any Seller Contract that
is not set forth on Part 1.1(f) of the Disclosure Schedule;

 

(k)                                any Liability of the Seller that relates to
any Excluded Asset;

 

(l)                                    any Liability arising out of or relating to (A) any
product produced or sold or any services performed by or on behalf of the
Seller, (B) the presence of any Hazardous Material at any site owned,
leased, occupied or controlled by the Seller on or at any time prior to the
Closing, (C) the generation, manufacture, production, transportation,
importation, use, treatment, refinement, processing, handling, storage,
discharge, release or disposal of any Hazardous Material (whether lawfully or
unlawfully) by or on behalf of the Seller;

 

(m)                              any Liability arising out of or relating to
any employee grievance whether or not the affected employees are hired by the
Purchaser that is based on acts or omissions of the Seller that occurred at,
prior to, or after the Closing;

 

(n)                                 any Liability to indemnify, reimburse or
advance amounts to any officer, director, employee or agent of the Seller;

 

(o)                                  any Liability to distribute to any of the
Seller’s shareholders or otherwise apply all or any part of the consideration
received hereunder;

 

(p)                                  any Liability arising out of or resulting
from Seller’s compliance or noncompliance with any Legal Requirement or Order
of any Governmental Body;

 

(q)                                  any Liability relating to any failure to
comply with any bulk transfer law, fraudulent transfer law or similar Legal
Requirement in connection with any of the Transactions;

 

(r)                                  any Liability relating to the Worker Adjustment
and Retraining Notification Act, 29 U.S.C. §2101, et seq. (“WARN”) or
any similar state or local Legal Requirement that may result from an “Employment
Loss,” as defined by 29 U.S.C. sect. 2101(a)(6), caused by any action of the
Seller prior to the Closing or by the Purchaser’s decision not to hire previous
employees of the Seller; and

 

(s)                                  any other Liability that is not specifically
referred to in Section 1.3.

 

1.5                               Purchase Price.

 

(a)                                  As consideration for the sale of the Assets
to the Purchaser (such total consideration being referred to herein as the “Purchase Price”), the Purchaser
shall do the following :

 

(i)                                    Assume the Assumed Liabilities;

 

(ii)                                At the Closing, issue to the Seller that
number of shares of common stock of the Purchaser (the “Common
Stock”) equal to (I) the quotient obtained by dividing $1,527,000
by $1.633 (the “Initial Per Share Price”)
multiplied by (II) 50% (rounded up to the nearest whole share) (the “Initial Shares”).

 

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(iii)                            On the
six-month anniversary of the Closing (the “Additional Issuance Date”),
issue to the Seller that number
of shares of Common Stock equal to (I) the quotient obtained by dividing $1,502,000
by the Additional Per Share Price, multiplied by 90% (rounded up to the nearest
whole share) (the “Additional Shares” and,
collectively with the Initial Shares, the “Issued Shares”).
The “Additional Per Share Price” shall
be the greater of (A) the Initial Per Share Price (as adjusted in the event that there occurs any
stock dividend, stock split, recapitalization or similar event with respect to
the Common Stock after the Closing and prior to the Additional Issuance Date); and (B) the
volume weighted average closing price of the Common Stock over the 20
trading-day period ending on the date immediately preceding the Additional
Issuance Date, as reported on The American Stock Exchange (“AMEX”) and, if the Common Stock is
not quoted on AMEX at any time during such period, as reported on the
Over-the-Counter Bulletin Board (the “OTCBB”) or
the Pink Sheets Electronic Quotation Service (the “Pink
Sheets”), as applicable, for the portion of such period that the
Common Stock is listed or quoted on the OTCBB or the Pink Sheets.

 

(iv)                               Deposit into an escrow account (the “Escrow Account”) to be established
as of the Closing pursuant to an escrow agreement by and among the Seller, the
Seller Representative (as defined in Section 6.2(a)), the Purchaser and
LaSalle National Bank (the “Escrow Agent”),
in a form to be agreed upon by such parties (the “Escrow
Agreement”):  (I) at
the Closing, that number of shares of Common Stock equal to (A) the
quotient obtained by dividing $1,527,000 by the Initial Per Share Price,
multiplied by (B) 50% (rounded down to the nearest whole share) (the “Initial Escrow Shares”); and (II) on
the Additional Issuance Date, that number of shares of Common Stock equal to (A) the quotient obtained by
dividing $1,502,000 by the Additional Per Share Price multiplied by (B) 10%
(rounded down to the nearest whole share) (the “Additional
Escrow Shares” and, collectively with the Initial Escrow Shares,
the “Escrow Shares” and, together with
the Issued Shares, the “Shares”)).  The “Indemnification Escrow
Shares”  shall be comprised of 33.33% of the Initial Escrow
Shares and 33.33% of the Additional Escrow Shares. The “Reimbursement
Escrow Shares” shall be comprised of 66.66% of the Initial
Escrow Shares and 66.66% of the Additional Escrow Shares, and shall include the
proceeds received from the sale of the Shares.

 

1.6                               Sales Taxes. The Seller shall bear and pay, and shall
reimburse the Purchaser and the Purchaser’s affiliates for, any sales Taxes,
use Taxes, transfer Taxes, documentary charges, recording fees or similar
Taxes, charges, fees or expenses that may become payable in connection with the
sale of the Assets to the Purchaser or in connection with any of the other
Transactions. The Seller shall cooperate with the Purchaser to file all
requests for certifications of sales and use tax due, including, without
limitation, pursuant to Section 6812 of the California Revenue and
Taxation Code.

 

1.7                               Tax Treatment.  For
federal income tax purposes, Seller and Purchaser intend for the transactions
contemplated hereby to qualify as a reorganization (a “Reorganization”)
within the meaning of Section 368(a) of the Code and the regulations
promulgated thereunder (the “Treasury Regulations”),
and, by approving resolutions authorizing this Agreement, to adopt this
Agreement as a plan of Reorganization. 
Neither Seller nor Purchaser will knowingly take any action or fail to
take any action, which action or failure to act would cause the transactions
contemplated hereby to fail to qualify as a Reorganization.  Seller and Buyer will report the transaction
for federal income tax, financial reporting, and other purposes, as a
Reorganization.

 

1.8                               Closing.  The
closing of the sale of the Assets to the Purchaser (the “Closing”)
shall take place concurrently with the execution and delivery of this Agreement
at the offices of Paul, Hastings, Janofsky & Walker LLP in San Diego,
California.

 

1.9                               Deliveries by the Seller. At the Closing, the Seller shall:

 

(a)                                  execute and deliver to the Purchaser such
bills of sale, endorsements, assignments, permits, third party consents, lien
releases, and such other documents as may (in the judgment of the Purchaser or
its counsel) be necessary or appropriate to sell, assign, transfer, convey and
deliver to the Purchaser good and valid title to the Assets free and clear of
any Encumbrances;

 

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(b)                                  execute and deliver to the Purchaser fully
executed and acknowledged or notarized assignment documents, in form ready for
filing or recording with the appropriate Governmental Body and reasonably
acceptable to the Purchaser, with respect to any Registered IP held in the name
of the Seller Representative or any other employee, contractor or other agent
of the Seller;

 

(c)                                  execute and deliver to the Purchaser fully
executed and acknowledged or notarized assignment documents, in form ready for
filing or recording with the appropriate Governmental Body and reasonably
acceptable to the Purchaser, with respect to any Seller IP;

 

(d)                                  execute and deliver to the Purchaser a duly
executed counterpart of each Transactional Agreement that is to be executed by
or on behalf of the Seller at the Closing;

 

(e)                                  deliver to the Purchaser a certificate of
good standing of the Seller as of a date within three business days of the
Closing issued by the Secretary of State (or similar official) of each of
California and Arizona;

 

(f)                                    execute and deliver to the Purchaser a
certified copy of: (i) resolutions duly adopted by the Seller’s board of
directors in accordance with the Seller’s articles of incorporation and bylaws
and applicable law, authorizing and approving this Agreement, the Escrow
Agreement and the Transactions; and (ii) an executed action by written
consent of the shareholders of the Seller, authorizing and approving this
Agreement, the Escrow Agreement and the Transactions, and appointing the Seller
Representative as the representative of the Seller with respect to the
foregoing, in accordance with the Seller’s articles of incorporation and bylaws
and applicable law;

 

(g)                                 execute and deliver to the Purchaser such
other instruments as shall be requested by the Purchaser to vest in the
Purchaser title in and to the Assets free and clear of any Encumbrances in
accordance with the provisions hereof;

 

(h)                                 deliver to the Purchaser forbearance
agreements from the holders of promissory notes issued by Seller, in a form
acceptable to Purchaser; and

 

(i)                                    an employment agreement between the Purchaser
and Mitchell (the “Mitchell Employment Agreement”).

 

1.10                        Deliveries by the Seller
Representative. At the
Closing, the Seller Representative shall execute and deliver to the Purchaser
the Escrow Agreement.

 

1.11                        Deliveries by the Purchaser. At the Closing, the Purchaser shall:

 

(a)                                  issue to the Seller the Initial Shares;

 

(b)                                  deposit the Initial Escrow Shares into the
Escrow Account;

 

(c)                                  execute and deliver to the Seller a duly
executed counterpart of each Transactional Agreement that is to be executed by
or on behalf of the Purchaser at the Closing; and

 

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(d)                                  execute and deliver to Mitchell a counterpart
to the Mitchell Employment Agreement.

 

1.12                        On the Additional Issuance Date, the
Purchaser shall:

 

(a)                                  issue to the Seller the Additional Shares;
and

 

(b)                                  deposit the Additional Escrow Shares into the
Escrow Account.

 

1.13                        The Parties acknowledge that, pursuant to
this Agreement, as part of the plan of reorganization, the Seller will sell the
Liability Payoff Shares pursuant to an effective registration statement as soon
as reasonably practicable after the Closing and shall use the proceeds thereof
solely for payment to creditors of the Seller.

 

2.                                      REPRESENTATIONS AND WARRANTIES OF
THE SELLER AND MITCHELL.

 

Except as set forth in the Disclosure
Schedule, the Seller and Mitchell, jointly and severally, represent and
warrant, to and for the benefit of the Purchaser Indemnitees as follows:

 

2.1                               Due Organization; No
Subsidiaries; Etc. The
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the State of California. The Seller is not required to be
qualified, authorized, registered or licensed to do business as a foreign
corporation in any jurisdiction other than the jurisdictions listed in Part 2.1
of the Disclosure Schedule. The Seller is in good standing as a foreign
corporation in each of the jurisdictions listed in Part 2.1 of the
Disclosure Schedule. The Seller does not have any subsidiaries, and does not
own, beneficially or otherwise, any shares or other securities of, or any
direct or indirect interest of any nature in, any other Entity. The Seller has
never conducted any business under or otherwise used, for any purpose or in any
jurisdiction, any fictitious name, assumed name, trade name or other name,
other than “Sol Logic.”

 

2.2                               Articles of Incorporation and
Bylaws; Records. The Seller
has delivered to (or made available for inspection by) the Purchaser accurate
and complete copies of: (i) the articles of incorporation and bylaws of
the Seller, as currently in effect; (ii) the stock records of the Seller;
and (iii) the minutes and other records of the meetings and other
proceedings (including any actions taken by written consent or otherwise
without a meeting) of the shareholders of the Seller, the board of directors of
the Seller and all committees of the board of directors of the Seller. There
have been no meetings or other proceedings of the shareholders of the Seller,
the board of directors of the Seller or any committee of the board of directors
of the Seller that are not reflected in such minutes or other records.

 

2.3                               Capitalization.  The
shareholders listed on Part 2.3 of the Disclosure Schedule are the
sole shareholders of the Seller.  There
is no:  (a) outstanding
subscription, option, call, warrant or right (whether or not currently
exercisable) to acquire any shares of the capital stock or other securities of
the Seller; (b) outstanding security, instrument or obligation that is or
may become convertible into or exchangeable for any shares of the capital stock
or other securities of the Seller; or (c) Contract under which the Seller
is or may become obligated to sell or otherwise issue any shares of its capital
stock or any other securities. No Person other than the individuals and
entities set forth in Part 2.3 of the Disclosure Schedule has any
right to vote with respect to the sale of the Assets to the Purchaser or any of
the other Transactions.

 

2.4                               Financial Statements. The Seller has delivered to the Purchaser
the following financial statements (collectively, the “Financial
Statements”):  (a) the
unaudited balance sheet of the Seller as of December 31, 2006 and the
unaudited related statement of income and retained earnings and cash flows 

 

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for
the year then ended, together with the notes thereto; and (b) the
unaudited balance sheet of the Seller as of October 31, 2007 (the “Interim Balance Sheet”), and the
unaudited related statements of income and retained earnings and cash flows for
the 10 months then ended. The Financial Statements have been prepared in
accordance with the books and records of Seller applied on a consistent basis
throughout the periods covered and present fairly in all material respects the
financial position of the Seller as of the respective dates thereof and the
results of operations and cash flows of the Seller for the periods covered
thereby (subject to normal recurring year-end audit adjustments).

 

2.5                               Absence of Changes. Since October 31, 2007: (a) there
has not been any adverse change in, and no event has occurred that has had a
material adverse effect on, the business, condition, assets, liabilities,
operations, financial performance, net income or prospects of the Seller; (b) there
has not been any material loss, damage or destruction to, or any interruption
in the use of, any of the assets of the Seller (whether or not covered by
insurance); (c) the Seller has not (i) declared, accrued, set aside
or paid any dividend or made any other distribution in respect of any shares of
capital stock or other securities, or (ii) repurchased, redeemed or
otherwise reacquired any shares of capital stock or other securities; (d) the
Seller has not purchased or otherwise acquired any material asset from any
other Person, except for supplies acquired by the Seller in the Ordinary Course
of Business; (e) the Seller has not leased or licensed any asset from any
other Person (other than ordinary shrink wrap software); (f) the Seller
has not made any material capital expenditure; (g) the Seller has not sold
or otherwise transferred, or leased or licensed, any asset to any other Person
other than in the Ordinary Course of Business; (h) the Seller has not
written off as uncollectible, or established any extraordinary reserve with
respect to, any account receivable or other indebtedness; (i) the Seller
has not made any loan or advance to any other Person; (j) no Contract by
which the Seller or any of the assets owned or used by the Seller is or was
bound, or under which the Seller has or had any rights or interest, has been
amended or terminated; (k) the Seller has not incurred, assumed or
otherwise become subject to any Liability, other than accounts payable (of the
type required to be reflected as current liabilities in the “liabilities”
column of a balance sheet prepared in accordance with GAAP) incurred by the
Seller in bona fide transactions entered into in the Ordinary Course of
Business; (l) the Seller has not discharged any Encumbrance or discharged
or paid any indebtedness or other Liability, except for accounts payable that (I) are
reflected as current liabilities in the “liabilities” column of the Interim
Balance Sheet or have been incurred by the Seller since October 31, 2007
in bona fide transactions entered into in the Ordinary Course of Business, and (II) have
been discharged or paid in the Ordinary Course of Business; (m) the Seller
has not forgiven any debt or otherwise released or waived any right or claim; (n) the
Seller has not changed any of its methods of accounting or accounting practices
in any respect; (o) the Seller has not entered into any transaction or
taken any other action outside the Ordinary Course of Business; and (p) the
Seller has not agreed, committed or offered (in writing or otherwise) to take
any of the actions referred to in clauses “(c)” through “(o)” above.

 

2.6                               Title to Assets. The Seller owns, and has good and valid
title to, all of the Assets, including all rights of the Seller under Seller
Contracts.  All of the Assets are owned
by the Seller free and clear of any Encumbrances.  The Assets constitute all of the properties,
rights, interests and other tangible and intangible assets necessary to conduct
the business in the manner in which such business is currently being conducted
by the Seller.

 

2.7                               Receivables. As of the date hereof, there are no accounts
receivable, notes receivable or other receivables of the Seller.

 

2.8                               Customers; Distributors.  Part 2.8
of the Disclosure Schedule accurately identifies, and provides an accurate and
complete breakdown of the revenues received from, each customer or other Person
that (together which such customer’s or other Person’s affiliates) accounted
for (i) more than $20,000 of the gross revenues of the Seller in any of
2005 or 2006, or (ii) more than $15,000 of the gross 

 

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revenues
of the Seller in the first 10 months of 2007. Seller has not received any
notice or other communication (in writing or otherwise), and Seller has not
received any other information, indicating that any customer or other Person
identified or required to be identified in Part 2.8 of the
Disclosure Schedule may cease dealing with the Seller or may otherwise reduce
the volume of business transacted by such Person with the Seller below
historical levels.  Seller has not
received any notice or other communication (in writing or otherwise), or has
received any other information, indicating that any distributor of any of the
Seller’s products may cease acting as a distributor of such products or
otherwise dealing with the Seller.

 

2.9                               Inventory. 
Seller has no inventory.

 

2.10                        Equipment, Etc.  Part 2.10 of the Disclosure
Schedule accurately identifies all equipment, materials, prototypes, tools,
supplies, vehicles, furniture, fixtures, improvements and other tangible assets
owned by the Seller with a book value in excess of $5,000.  Part 2.10 of the Disclosure Schedule
also accurately identifies all tangible assets leased to the Seller.  Each asset identified or required to be
identified in Part 2.10 of the Disclosure Schedule: (i) is
structurally sound, free of defects and deficiencies and in good condition and repair
(ordinary wear and tear excepted); (ii) complies in all material respects
with, and is being operated and otherwise used in material compliance with, all
applicable Legal Requirements; and (iii) is adequate and appropriate for
the uses to which it is being put.

 

2.11                        Real Property. The Seller does not own any real property or
any interest in real property, including any leasehold created under a real
property lease.

 

2.12                        Intellectual Property.

 

(a)                                  Part 2.12(a) of the Disclosure Schedule accurately identifies
and describes:

 

(i)                                    in Part 2.12(a)(i) of the
Disclosure Schedule, each proprietary product or service developed,
manufactured, marketed, or sold
by the Seller at any time since December 31, 2003, and any product or
service currently under development by the Seller;

 

(ii)                                in Part 2.12(a)(ii) of the
Disclosure Schedule: (A) each item of Registered IP in which the Seller
has or purports to have an ownership interest of any nature (whether
exclusively, jointly with another Person or otherwise); (B) the jurisdiction in which such item of
Registered IP has been registered or filed and the applicable registration or
serial number; (C) any other Person that has an ownership interest in such
item of Registered IP and the nature of such ownership interest; and (D) each
product or service identified in Part 2.12(a)(i) of the
Disclosure Schedule that embodies, utilizes or is based upon or derived from
(or, with respect to products and services under development, that is expected
to embody, utilize or be based upon or derived from) such item of Registered
IP;

 

(iii)                            in Part 2.12(a)(iii) of the
Disclosure Schedule: (A) all Intellectual Property Rights or Intellectual
Property licensed to the Seller (other than any non-customized software that: (1) is
so licensed solely in executable or
object code form pursuant to a nonexclusive, internal use software license; (2) is
not incorporated into, or used directly in the development, manufacturing or
distribution of, the products or services of the Seller; and (3) is generally
available on standard terms for less than $100); (B) the corresponding
Contract or Contracts pursuant to which such Intellectual Property Rights or
Intellectual Property is licensed to the Seller; and (C) whether the
license or licenses so granted to the Seller are exclusive or nonexclusive; and

 

9

 

(iv)                               in Part 2.12(a)(iv) of the
Disclosure Schedule, each Contract pursuant to which any Person has been
granted any license under, or otherwise has received or acquired any right
(whether or not currently exercisable) or interest in, any Seller IP.

 

(b)                                  The Seller has provided to the Purchaser a
complete and accurate copy of each standard form of Seller IP Contract
currently used by the Seller, including each standard form of:  (i) end user license agreement; (ii) development
agreement; (iii) distributor or reseller agreement; (iv) employee
agreement containing any assignment or license of Intellectual Property or
Intellectual Property Rights or any confidentiality provision; (v) consulting
or independent contractor agreement containing any assignment or license of
Intellectual Property or Intellectual Property Rights or any confidentiality
provision; or (vi) confidentiality or nondisclosure agreement. Part 2.12(b) of
the Disclosure Schedule accurately identifies each Seller IP Contract that
deviates in any material respect from the corresponding standard form agreement
provided to the Purchaser. Except for the nonexclusive licenses and rights
granted in Contracts identified in Part 2.12(a)(iv) of the
Disclosure Schedule, the Seller is not bound by, and no Seller IP is subject
to, any Contract containing any covenant or other provision that in any way
limits or restricts the ability of the Seller to use, exploit, assert, or
enforce any Seller IP anywhere in the world.

 

(c)                                  The Seller owns all right, title and interest
to and in the Seller IP (other than Intellectual Property Rights or
Intellectual Property exclusively licensed to the Seller, as identified in Part 2.12(a)(iii) of
the Disclosure Schedule) free and clear of any Encumbrances (other than
nonexclusive licenses granted pursuant to the Contracts listed in Part 2.12(a)(iv) of
the Disclosure Schedule). Without limiting the generality of the foregoing:

 

(i)                                    all documents and instruments necessary to perfect the rights of the Seller in the
Seller IP have been validly executed, delivered and filed in a timely manner
with the appropriate Governmental Body;

 

(ii)                                each Person who is or was an employee or
independent contractor of the Seller and who is or was involved in the creation or development of any Seller IP
has signed a valid and enforceable agreement containing an irrevocable
assignment of Intellectual Property Rights to the Seller and confidentiality
provisions protecting the Seller IP;

 

(iii)                            no Seller Employee has any claim, right (whether or not
currently exercisable) or interest to or in any Seller IP;

 

(iv)                               no employee or independent contractor of the
Seller is: (A) bound by or otherwise subject to any Contract restricting
him or her from performing his or her duties for the Seller; or (B) in
breach of any Contract with any former employer or other Person concerning
Intellectual Property Rights or confidentiality;

 

(v)                                   no funding, facilities or personnel of any
Governmental Body were used, directly or indirectly, to develop or create, in
whole or in part, any Seller IP;

 

(vi)                               the Seller has taken reasonable steps to
maintain the confidentiality of and otherwise protect and enforce its rights in all proprietary
information held by the Seller, or purported to be held by the Seller, as a
trade secret;

 

10

 

(vii)                           since December 31, 2003, the Seller has
never assigned or otherwise transferred ownership of, or agreed to assign or otherwise transfer ownership
of, any Intellectual Property Right to any other Person;

 

(viii)                       the Seller is not now nor has ever been a
member or promoter of, or a contributor to, any industry standards body or similar organization that could
require or obligate the Seller to grant or offer to any other Person any
license or right to any Seller IP; and

 

(ix)                              the Seller owns or otherwise has all
Intellectual Property Rights needed to conduct the business of the Seller as
currently conducted by the Seller.

 

(d)                                  All Seller IP is valid, subsisting and
enforceable. Without limiting the generality of the foregoing:

 

(i)                                    each U.S. patent application and U.S. patent
in which the Seller has or purports to have an ownership interest was filed within one year of the first
printed publication, public use or offer for sale of each invention described
in such U.S. patent application or U.S. patent;

 

(ii)                                each foreign patent application and foreign
patent in which the Seller has or purports to have an ownership interest was
filed, or claims priority to a patent application filed, before the time at
which each invention described in such foreign patent application or foreign
patent was first made available to the public;

 

(iii)                            no trademark (whether registered or
unregistered) or trade name owned, used, or applied for by the Seller conflicts or interferes with any trademark
(whether registered or unregistered) or trade name owned, used or applied for
by any other Person;

 

(iv)                               none of the goodwill associated with or
inherent in any trademark (whether registered or unregistered) in which the
Seller has or purports to have an ownership interest has been impaired;

 

(v)                                   each item of Seller IP that is Registered IP
is and at all times has been in compliance with all Legal Requirements, and all
filings, payments and other actions required to be made or taken to maintain
such item of Seller IP in full force and effect have been made by the
applicable deadline;

 

(vi)                               no application for a patent or for a
copyright, mask work or trademark registration or any other type of Registered IP filed by or on behalf of
the Seller has been abandoned, allowed to lapse or rejected;

 

(vii)                           Part 2.12(d)(vii) of the Disclosure Schedule identifies
each filing, payment, and action that must
be made or taken on or before the date that is 180 days after the date of this
Agreement in order to maintain each such item of Seller IP in full force and
effect;

 

(viii)                       the Seller has provided to the Purchaser
complete and accurate copies of all applications, correspondence and other material documents related to each
such item of Registered IP; and

 

(ix)                              no
interference, opposition, reissue, reexamination or other Proceeding of any
nature is or has been pending or, to the best of the Knowledge of each of the
Seller and each Shareholder, threatened, in which the scope, validity or
enforceability of any Seller IP is being, has been or could reasonably be
expected to be contested or challenged.

 

11

 

(e)                                  Neither the execution, delivery or
performance of any of the Transactional Agreements nor the consummation of any
of the Transactions will, with or without notice or the lapse of time or both,
result in or give any other Person the right or option to cause or declare: (i) a
loss of, or Encumbrance on, any Seller IP; (ii) a breach of any Contract
listed or required to be listed in Part 2.12(a)(iii) of the
Disclosure Schedule; (iii) the release, disclosure or delivery of any
Seller IP by or to any escrow agent or other Person; or (iv) the grant,
assignment or transfer to any other Person of any license or other right or
interest under, to or in any of the Seller IP.

 

(f)                                    To the Knowledge of the Seller, no Person has
infringed, misappropriated, or otherwise violated, and no Person is currently
infringing, misappropriating or otherwise violating, any Seller IP. Part 2.12(f) of
the Disclosure Schedule accurately identifies (and the Seller has provided to
the Purchaser a complete and accurate copy of) each letter or other written or
electronic communication or correspondence that has been sent or otherwise
delivered by or to the Seller or any Representative of the Seller regarding any
actual, alleged or suspected infringement or misappropriation of any Seller IP
and provides a brief description of the current status of the matter referred
to in such letter, communication or correspondence.

 

(g)                                 The Seller has never infringed (directly,
contributorily, by inducement or otherwise), misappropriated or otherwise
violated any Intellectual Property Right of any other Person. Without limiting
the generality of the foregoing:

 

(i)                                    no product, information or service ever
manufactured, produced, distributed, published, used, provided or sold by or on
behalf of the Seller, and no Intellectual Property ever owned, used or developed by the Seller, has ever infringed,
misappropriated or otherwise violated any Intellectual Property Right of any
other Person;

 

(ii)                                no infringement, misappropriation or similar
claim or Proceeding is pending or has been threatened against the Seller or against any other Person who
may be entitled to be indemnified, defended, held harmless or reimbursed by the
Seller with respect to such claim or Proceeding;

 

(iii)                            the Seller has never received any notice or other
communication (in writing or otherwise) relating to any actual, alleged or
suspected infringement, misappropriation or violation of any Intellectual
Property Right of another Person;

 

(iv)                               the Seller is not bound by any Contract to
indemnify, defend, hold harmless or reimburse any other Person with respect to any intellectual property
infringement, misappropriation or similar claim (other than pursuant to the
standard forms of Seller IP Contracts described in Section 2.12(b));

 

(v)                                   the Seller has never assumed, or agreed to
discharge or otherwise take responsibility for, any existing or potential
liability of another Person for infringement, misappropriation or violation of
any Intellectual Property Right; and

 

(vi)                               no claim or Proceeding involving any
Intellectual Property or Intellectual Property Right licensed to the Seller is
pending or, to the best of the Knowledge of each of the Seller and each
Shareholder, has been threatened, except for any such claim or Proceeding that,
if adversely determined, would
not adversely affect: (A) the use or exploitation of such Intellectual
Property or Intellectual Property Right by the Seller; or (B) the
manufacturing, distribution or sale of any product or service being developed,
offered, manufactured, distributed or sold by the Seller.

 

12

 

(h)                                 None of the Seller Software: (i) contains
any bug, defect or error (including any bug, defect or error relating to or
resulting from the display, manipulation, processing, storage, transmission or
use of date data) that materially and adversely affects the use, functionality
or performance of such Seller Software or any product or system containing or
used in conjunction with such Seller Software; or (ii) fails to comply
with any applicable warranty or other contractual commitment relating to the
use, functionality or performance of such software or any product or system
containing or used in conjunction with such Seller Software. The Seller has
provided to the Purchaser a complete and accurate list of all known bugs,
defects and errors in each version and component of the Seller Software.

 

(i)                                    None of the Seller Software contains any “back
door,” “drop dead device,” “time bomb,” “Trojan horse,” “virus,” or “worm” (as
such terms are commonly understood in the software industry) or any other code
designed or intended to have, or capable of performing, any of the following
functions: (i) disrupting, disabling, harming or otherwise impeding in any
manner the operation of, or providing unauthorized access to, a computer system
or network or other device on which such code is stored or installed; or (ii) damaging
or destroying any data or file without the user’s consent.

 

(j)                                    None of the Seller Software is subject to any
“copyleft” or other obligation or condition (including any obligation or
condition under any “open source” license such as the GNU Public License,
Lesser GNU Public License or Mozilla Public License) that: (i) could or
does require, or could or does condition the use or distribution of such Seller
Software on, the disclosure, licensing or distribution of any source code for
any portion of such Seller Software; or (ii) could or does otherwise
impose any limitation, restriction or condition on the right or ability of the
Seller to use or distribute any Seller Software.

 

(k)                                No source code for any Seller Software has
been delivered, licensed or made available to any escrow agent or other Person
who is not, as of the date of this Agreement, an employee of the Seller. The
Seller does not has any duty or obligation (whether present, contingent or
otherwise) to deliver, license or make available the source code for any Seller
Software to any escrow agent or other Person who is not, as of the date of this
Agreement, an employee of the Seller. No event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of time
or both) will, or could reasonably be expected to, result in the delivery,
license or disclosure of any source code for any Seller Software to any other
Person who is not, as of the date of this Agreement, an employee of the Seller.

 

2.13                        Contracts. Part 2.13 of the Disclosure
Schedule identifies each Seller Contract, except for any Immaterial Contract.
The Seller has delivered to the Purchaser accurate, complete and fully executed
copies of all Seller Contracts identified in Part 2.13 of the Disclosure
Schedule, including all amendments, exhibits and schedules thereto. Each Seller
Contract is valid and in full force and effect. 
To the Knowledge of Seller, no Person has violated or breached, or
declared or committed any default under, any Seller Contract. No event has
occurred, and no circumstance or condition exists, that is reasonably likely to
(with or without notice or lapse of time or both) (A) result in a
violation or breach of any of the material provisions of any Seller Contract, (B) give
any Person the right to declare a default or exercise any remedy under any
Seller Contract, (C) give any Person the right to accelerate the maturity
or performance of any Seller Contract, or (D) give any Person the right to
cancel, terminate or modify any Seller Contract (except pursuant to the
amendment provisions contained therein and except with respect to the
termination of Seller Contracts by their terms). The Seller has not received
any notice or other 

 

13

 

communication
(in writing or otherwise) regarding any actual, alleged, possible or potential
violation or breach of, or default under, any Seller Contract. The Seller has
not waived any material right under any Seller Contract. To the Knowledge of
Seller, each Person against which the Seller has or may acquire any rights
under any Seller Contract is solvent and is able to satisfy all of such Person’s
current and future monetary obligations and other obligations and Liabilities
thereunder. The Seller has never guaranteed or otherwise agreed to cause,
insure or become liable for, and the Seller has never pledged any of its assets
to secure, the performance or payment of any obligation or other Liability of
any other Person. The performance of the Seller Contracts will not result in
any violation of or failure to comply with any Legal Requirement. No Person is
renegotiating, or has the right to renegotiate, any amount paid or payable to
the Seller under any Seller Contract. The Contracts identified in Part 2.13
of the Disclosure Schedule collectively constitute all of the Contracts
necessary to enable the Seller to conduct its business in the manner in which
such business is currently being by the Seller. Part 2.13 of the
Disclosure Schedule identifies each proposed Contract as to which any bid,
offer, written proposal, term sheet or similar document has been submitted or
received by the Seller.

 

2.14                        Liabilities; Major Suppliers.

 

(a)                                  The Seller has no Liabilities of a nature
required to be reflected on or reserved against in financial statements that
are prepared in accordance with GAAP, except for: (i) liabilities
identified as such in the “liabilities” columns of the Interim Balance Sheet; (ii) accounts
payable (of the type required to be reflected as current liabilities in the “liabilities”
column of a balance sheet prepared in accordance with GAAP) or other
Liabilities incurred by the Seller in bona fide transactions entered into in
the Ordinary Course of Business since October 31, 2007; (iii) performance
obligations under the Contracts listed in Part 2.13 of the Disclosure
Schedule; and (iv) those incurred by the Seller in connection with the execution
of this Agreement.

 

(b)                                  Part 2.14 of the Disclosure Schedule provides: (i) an
accurate and complete breakdown and aging of the accounts payable of the Seller
as of the date hereof, and (ii) an accurate and complete breakdown of all
notes payable and other indebtedness for borrowed money of the Seller as of the
date hereof.

 

(c)                                  Part 2.14 of the Disclosure Schedule accurately
identifies, and provides an accurate and complete breakdown of the amounts paid
to, each supplier or other Person that (together which such Person’s
affiliates) received (i) more than $20,000 in the aggregate from the
Seller in 2005 or 2006, or (ii) more than $15,000 in the aggregate from
the Seller in the first 10 months of 2007.

 

(d)                                  Seller has never (i) made a general
assignment for the benefit of creditors, (ii) filed, or had filed against
it, any bankruptcy petition or similar filing, (iii) suffered the
attachment or other judicial seizure of all or a substantial portion of its
assets, (iv) admitted in writing its inability to pay its debts as they
become due or (vi) taken or been the subject of any action that may have
an adverse effect on its ability to comply with or perform any of its covenants
or obligations under any of the Transactional Agreements.

 

2.15                        Compliance with Legal
Requirements. The Seller is
in material compliance with each Legal Requirement that is applicable to it or
to the conduct of its business or the ownership or use of any of its assets; (b) the
Seller has at all times been in material compliance with each Legal Requirement
that is or was applicable to it or to the conduct of its business or the
ownership or use of any of its assets; (c) no event has occurred, and no
condition or circumstance exists, that is reasonably likely to (with or without
notice or lapse of time or both) constitute or result directly or indirectly in
a violation by the Seller of, or a failure on the part of the Seller to comply
with, any Legal Requirement; and (d) the Seller has not received, at any
time, any notice or other communication (in writing or otherwise) from any 

 

14

 

Governmental
Body or any other Person regarding (i) any actual, alleged, possible or
potential violation of, or failure to comply with, any Legal Requirement, or (ii) any
actual, alleged, possible or potential obligation on the part of the Seller to
undertake, or to bear all or any portion of the cost of, any cleanup or any
remedial, corrective or response action of any nature. To Seller’s Knowledge,
no Governmental Body has proposed or is considering any Legal Requirement that,
if adopted or otherwise put into effect, (Y) may have an adverse effect on
the Assets or the Seller to comply with or perform any covenant or obligation
under any of the Transactional Agreements, or (Z) may have the effect of
preventing, delaying, making illegal or otherwise interfering with any of the
Transactions.

 

2.16                        Governmental Authorizations.  Part 2.16 of the Disclosure
Schedule identifies: (a) each material Governmental Authorization that is
held by the Seller; and (b) each other Governmental Authorization that, to
the Knowledge of the Seller, is held by any employee of the Seller and is used
by Seller in connection with the business of the Seller. The Seller has
delivered to the Purchaser accurate and complete copies of all of the
Governmental Authorizations identified in Part 2.16 of the Disclosure
Schedule, including all renewals thereof and all amendments thereto. Each
Governmental Authorization identified or required to be identified in Part 2.16
of the Disclosure Schedule is valid and in full force and effect. The Seller is
and has at all times been in material compliance with all of the terms and
requirements of each Governmental Authorization identified or required to be
identified in Part 2.16 of the Disclosure Schedule. No event has occurred,
and no condition or circumstance exists, that is reasonably likely to (with or
without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or
requirement of any Governmental Authorization identified or required to be
identified in Part 2.16 of the Disclosure Schedule, or (B) result in
the revocation, withdrawal, suspension, cancellation, termination or modification
of any Governmental Authorization identified or required to be identified in Part 2.16
of the Disclosure Schedule. The Seller has never received any notice or other
communication (in writing or otherwise) from any Governmental Body or any other
Person regarding (I) any actual, alleged, possible or potential violation
of or failure to comply with any term or requirement of any Governmental
Authorization, or (II) any actual, proposed, possible or potential
revocation, withdrawal, suspension, cancellation, termination or modification
of any Governmental Authorization. All applications required to have been filed
for the renewal of the Governmental Authorizations required to be identified in
Part 2.16 of the Disclosure Schedule have been duly filed on a timely
basis with the appropriate Governmental Bodies, and each other notice or filing
required to have been given or made with respect to such Governmental
Authorizations has been duly given or made on a timely basis with the
appropriate Governmental Body. The Seller has all of the Governmental
Authorizations necessary (Y) to enable the Seller to conduct its business
in the manner in which such business is currently being conducted by the Seller
and (Z) to permit the Seller to own and use its assets in the manner in
which they are currently being owned and used by the Seller.

 

15

 

2.17                        Tax Matters. Each Tax required to have been paid, or
claimed by any Governmental Body to be payable, by the Seller has been duly paid
in full on a timely basis. Any Tax required to have been withheld or collected
by the Seller has been duly withheld and collected; and (to the extent
required) each such Tax has been paid to the appropriate Governmental Body. Part 2.17
of the Disclosure Schedule accurately identifies each examination or audit of
any Tax Return of the Seller that has been conducted since December 31,
2003. The Shareholders and the Seller have delivered to the Purchaser accurate
and complete copies of all audit reports and similar documents (to which any
Shareholder or the Seller has access) relating to such Tax Returns. No claim or
other Proceeding is pending or has been threatened against or with respect to
the Seller in respect of any Tax. There are no unsatisfied Liabilities for
Taxes (including liabilities for interest, additions to tax and penalties
thereon and related expenses) with respect to any notice of deficiency or
similar document received by the Seller. The Seller has not entered into or
become bound by any agreement or consent pursuant to Section 341(f) of
the Code. There is no agreement, plan, arrangement or other Contract covering
any Seller Employee that, individually or collectively, could give rise
directly or indirectly to the payment of any amount that would not be
deductible pursuant to Section 280G or Section 162 of the Code. The
Shareholders and the Seller have delivered to the Purchaser accurate and
complete copies of all Tax Returns that have been filed on behalf of or with
respect to the Seller since December 31, 2003. The information contained
in such Tax Returns is accurate and complete in all respects.

 

2.18                        Employee and Labor Matters.

 

(a)                                  Part 2.18(a) of the Disclosure Schedule accurately
sets forth, with respect to each current employee of the Seller (including any
employee of the Seller who is on a leave of absence or on layoff status) who
has accepted employment with Purchaser (a “Continuing Employee”):
(i) the name of such employee and the date as of which such employee was
originally hired by the Seller; (ii) such employee’s title; (iii) the aggregate dollar amount of the compensation
(including wages, salary, commissions, director’s fees, fringe benefits,
bonuses, profit-sharing payments and other payments or benefits of any type) received by such employee from the Seller with
respect to services performed in 2006 and the 11 months ended November 30,
2007; and (iv) such employee’s annualized compensation as of immediately prior to the Closing. No
current employee of the Seller holds any Governmental Authorization that is
used by the Seller in the conduct of its business.

 

(b)                                  There is no former employee of the Seller who
is receiving or is scheduled to receive (or whose spouse or other dependent is
receiving or is scheduled to receive) any benefits (whether from the Seller or
otherwise) relating to such former employee’s employment with the Seller.

 

(c)                                  The employment of each of the Seller’s
employees is terminable by the Seller at will. The Seller has delivered to the
Purchaser accurate and complete copies of all employee manuals and handbooks,
disclosure materials, policy statements and other materials relating to the
employment of the Continuing Employees.

 

(d)                                  To the Knowledge of the Seller:  (i) no employee of the Seller has
received an offer to join a business that Seller believes is competitive with
the Seller’s business; (ii) no employee of the Seller is a party to or is
bound by any confidentiality agreement, noncompetition agreement or other
Contract (with any Person) that may have an adverse effect on: (A) the
performance by such employee of any of his or her duties or responsibilities as
an employee of the Seller; (B) the
Seller’s business or operations; or (B) the Purchaser’s business or
operations as of or after the Closing in the event such employee becomes an
employee or other service provider of the Purchaser or an affiliate thereof.

 

(e)                                  The Seller has no independent contractors.

 

16

 

(f)                                    The Seller is not a party to or bound by, and
the Seller has never been a party to or bound by, any employment agreement or
any union contract, collective bargaining agreement or similar Contract. The
Seller is not engaged, and the Seller has never been engaged, in any unfair
labor practice of any nature. There are no actions, suits, claims, labor
disputes or grievances pending or, to the Knowledge of the Seller, threatened
or reasonably anticipated relating to any labor, safety or discrimination
matters involving any Seller Employee, including, without limitation, charges
of unfair labor practices or discrimination complaints.

 

2.19                        Employee Benefit Plans and
Compensation.

 

(a)                                  Part 2.19(a) of the Disclosure Schedule contains an
accurate and complete list as of the date hereof of each Seller Employee Plan
and each Seller Employee Agreement. The Seller does not intend nor has it
committed to establish or enter into any new Seller Employee Plan or Seller
Employee Agreement, or to modify any Seller Employee Plan or Seller Employee
Agreement (except to conform any such Seller Employee Plan or Seller Employee
Agreement to the requirements of any applicable Legal Requirements, in each
case as previously disclosed to the Purchaser in writing or as required by this
Agreement).

 

(b)                                  The Seller has delivered to the Purchaser: (i) correct
and complete copies of all documents setting forth the terms of each Seller
Employee Plan and each Seller Employee Agreement, including all amendments
thereto and all related trust documents; (ii) the three most recent annual
reports (Form Series 5500 and all schedules and financial statements
attached thereto), if any, required under ERISA or the Code in connection with
each Seller Employee Plan; (iii) if the Seller Employee Plan is subject to
the minimum funding standards of Section 302 of ERISA, the most recent
annual and periodic accounting of Seller Employee Plan assets; (iv) the
most recent summary plan description together with the summaries of material
modifications thereto, if any, required under ERISA with respect to each Seller
Employee Plan; (v) all material written Contracts relating to each Seller
Employee Plan, including administrative service agreements and group insurance
contracts; (vi) all written materials provided to any Seller Employee
relating to any Seller Employee Plan and any proposed Seller Employee Plans, in
each case, relating to any amendments, terminations, establishments, increases
or decreases in benefits, acceleration of payments or vesting schedules or
other events that would result in any liability to the Seller or any Seller
Affiliate; (vii) all correspondence to or from any Governmental Body
relating to any Seller Employee Plan; (viii) all COBRA forms and related
notices; (ix) all insurance policies in the possession of the Seller or
any Seller Affiliate pertaining to fiduciary liability insurance covering the
fiduciaries for each Seller Employee Plan; (x) all discrimination tests
required under the Code for each Seller Employee Plan intended to be qualified
under Section 401(a) of the Code for the three most recent plan
years; and (xi) the most recent IRS determination or opinion letter issued with
respect to each Seller Employee Plan intended to be qualified under Section 401(a) of
the Code.

 

(c)                                  The Seller and each of the Seller Affiliates
have performed all obligations required to be performed by them under each
Seller Employee Plan and are not in default or violation of, and neither the
Seller nor any of the Shareholders have Knowledge of any default or violation
by any other party to, the terms of any Seller Employee Plan, and each Seller
Employee Plan has been established and maintained substantially in accordance
with its terms and in substantial compliance with all applicable Legal
Requirements, including ERISA and the Code. Any Seller Employee Plan intended
to be qualified under Section 401(a) of the Code has obtained a
favorable determination letter (or opinion letter, if applicable) as to its
qualified status under the Code. No “prohibited transaction,” within the
meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and
not otherwise exempt under Section 408 of ERISA, has occurred with respect
to any Seller Employee Plan. There are no claims or Proceedings pending, or, to
the best of the Knowledge of each of the Seller and each Shareholder,
threatened or reasonably anticipated (other than routine claims for benefits),
against any 

 

17

 

Seller Employee Plan or
against the assets of any Seller Employee Plan. Each Seller Employee Plan
(other than any Seller Employee Plan to be terminated prior to the Closing in
accordance with this Agreement) can be amended, terminated or otherwise
discontinued after the Closing in accordance with its terms, without liability
to the Purchaser, the Seller or any Seller Affiliate (other than ordinary
administration expenses). There are no audits, inquiries or Proceedings pending
or, to the best of the Knowledge of each of the Seller and each Shareholder,
threatened by the IRS, DOL, or any other Governmental Body with respect to any
Seller Employee Plan. Neither the Seller nor any Seller Affiliate has ever
incurred any penalty or tax with respect to any Seller Employee Plan under Section 502(i) of
ERISA or Sections 4975 through 4980 of the Code. The Seller and each Seller
Affiliate have made all contributions and other payments required by and due
under the terms of each Seller Employee Plan.

 

(d)                                  Neither the Seller nor any Seller Affiliate
has ever maintained, established, sponsored, participated in, or contributed to
any: (i) Seller Pension Plan subject to Title IV of ERISA; or (ii) “multiemployer
plan” within the meaning of Section (3)(37) of ERISA. Neither the Seller
nor any Seller Affiliate has ever maintained, established, sponsored,
participated in or contributed to, any Seller Pension Plan in which stock of
the Seller or any Seller Affiliate is or was held as a plan asset. The fair
market value of the assets of each funded Foreign Plan, the liability of each
insurer for any Foreign Plan funded through insurance, or the book reserve
established for any Foreign Plan, together with any accrued contributions, is
sufficient to procure or provide in full for the accrued benefit obligations,
with respect to all current and former participants in such Foreign Plan
according to the actuarial assumptions and valuations most recently used to
determine employer contributions to and obligations under such Foreign Plan,
and no transaction contemplated by this Agreement shall cause any such assets
or insurance obligations to be less than such benefit obligations.

 

(e)                                  No Seller Employee Plan provides (except at
no cost to the Seller or any Seller Affiliate), or reflects or represents any
liability of the Seller or any Seller Affiliate to provide, retiree life insurance,
retiree health benefits or other retiree employee welfare benefits to any
Person for any reason, except as may be required by COBRA or other applicable
Legal Requirements. Other than commitments made that involve no future costs to
the Seller or any Seller Affiliate, neither the Seller nor any Seller Affiliate
has ever represented, promised or contracted (whether in oral or written form)
to any Seller Employee (either individually or to Seller Employees as a group)
or any other Person that such Seller Employee(s) or other person would be
provided with retiree life insurance, retiree health benefit or other retiree
employee welfare benefits, except to the extent required by applicable Legal
Requirements.

 

(f)                                    Except as expressly required or provided by this
Agreement, neither the execution of this Agreement nor the consummation of the
transactions contemplated hereby will (either alone or upon the occurrence of
any additional or subsequent events) constitute an event under any Seller
Employee Plan, Seller Employee Agreement, trust or loan that will or may result
(either alone or in connection with any other circumstance or event) in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Seller Employee.

 

(g)                                 The Seller and each of the Seller Affiliates:
(i) are, and at all times have been, in substantial compliance with all
applicable Legal Requirements respecting employment, employment practices,
terms and conditions of employment and wages and hours, in each case, with
respect to Seller Employees, including the health care continuation
requirements of COBRA, the requirements of FMLA, the requirements of HIPAA and
any similar provisions of state law; (ii) have withheld and reported all
amounts required by applicable Legal Requirements or by Contract to be withheld
and reported with respect to wages, salaries and other payments to Seller
Employees; (iii) are not liable for any arrears of wages or any taxes or
any penalty for failure to comply with the Legal Requirements applicable of the
foregoing; and (iv) are not liable for any payment to any trust or other
fund governed by or maintained 

 

18

 

by or on behalf of any
Governmental Body with respect to unemployment compensation benefits, social
security or other benefits or obligations for Seller Employees (other than
routine payments to be made in the normal course of business and consistent
with past practice). There are no pending or, to the best of the Knowledge of
the Seller and the Shareholders, threatened or reasonably anticipated claims or
Proceedings against the Seller or any Seller Affiliate under any worker’s
compensation policy or long-term disability policy.

 

(h)                                 To the best of the Knowledge of the Seller
and the Shareholders, no shareholder nor any Seller Employee is obligated under
any Contract or subject to any judgment, decree, or order of any court or other
Governmental Body that would interfere with such Person’s efforts to promote
the interests of the Seller or that would interfere with the business of the
Seller or any Seller Affiliate. Neither the execution nor the delivery of this
Agreement, nor the carrying on of the business of the Seller or any Seller
Affiliate as presently conducted nor any activity of such shareholder or Seller
Employees in connection with the carrying on of the business of the Seller or
any Seller Affiliate as presently conducted will, to the best of the Knowledge
of the Seller and the Shareholders, conflict with, result in a breach of the
terms, conditions or provisions of, or constitute a default under, any Contract
under which any of such shareholders or Seller Employees is now bound.

 

2.20                        Environmental Matters. The Seller is not liable or potentially
liable for any response cost or natural resource damages under Section 107(a) of
CERCLA, or under any other so-called “superfund” or “superlien” law or similar
Legal Requirement, at or with respect to any site. The Seller has never
received any notice or other communication (in writing or otherwise) from any
Governmental Body or other Person regarding any actual, alleged, possible or
potential Liability arising from or relating to the presence, generation,
manufacture, production, transportation, importation, use, treatment,
refinement, processing, handling, storage, discharge, release, emission or
disposal of any Hazardous Material. No Person has ever commenced or threatened
to commence any contribution action or other Proceeding against the Seller in
connection with any such actual, alleged, possible or potential Liability; and
no event has occurred, and no condition or circumstance exists, that may
directly or indirectly give rise to, or result in the Seller becoming subject
to, any such Liability. The Seller has never generated, manufactured, produced,
transported, imported, used, treated, refined, processed, handled, stored,
discharged, released or disposed of any Hazardous Material (whether lawfully or
unlawfully). The Seller has never permitted (knowingly or otherwise) any
Hazardous Material to be generated, manufactured, produced, used, treated,
refined, processed, handled, stored, discharged, released or disposed of
(whether lawfully or unlawfully): (i) on or beneath the surface of any
real property that is, or that has at any time been, owned by, leased to,
controlled by or used by the Seller; (ii) in or into any surface water,
groundwater, soil or air associated with or adjacent to any such real property;
or (iii) in or into any well, pit, pond, lagoon, impoundment, ditch,
landfill, building, structure, facility, improvement, installation, equipment,
pipe, pipeline, vehicle or storage container that is or was located on or
beneath the surface of any such real property or that is or has at any time
been owned by, leased to, controlled by or used by the Seller. All property
that is owned by, leased to, controlled by or used by the Seller, and all
surface water, groundwater, soil and air associated with or adjacent to such
property: (a) is in clean and healthful condition; (b) is free of any
Hazardous Material and any harmful chemical or physical conditions; and (c) is
free of any environmental contamination of any nature. No storage tank or other
storage container is or has been owned by, leased to, controlled by or used by
the Seller, or is located on or beneath the surface of any real property owned
by, leased to, controlled by or used by the Seller.

 

2.21                        Sale of Products. Each product that has been sold, licensed or
distributed by the Seller to any Person: (i) conformed and complied in all
material respects with the terms and requirements of any applicable warranty or
other Contract and with all applicable Legal Requirements; and (ii) was free
of any design defects construction defects or other defects or deficiencies at
the time of sale. The Seller has not incurred or otherwise become subject to
any Liability arising directly or indirectly from any product

 

19

 

manufactured
or sold by the Seller. No product manufactured or sold by the Seller has been
the subject of any recall or other similar action; and no event has occurred,
and no condition or circumstance exists, that might (with or without notice or
lapse of time) directly or indirectly give rise to or serve as a basis for any
such recall or other similar action relating to any such product.

 

2.22                        Performance of Services.  All
services that have been performed on behalf of the Seller were performed
properly and in full conformity with the terms and requirements of all
applicable warranties and other Contracts and with all applicable Legal
Requirements. There is no claim pending or being threatened against the Seller
relating to any services performed by the Seller, and, to the best of the
Knowledge of each of the Seller and each Shareholder, there is no basis for the
assertion of any such claim.

 

2.23                        Insurance.

 

(a)                                  Part 2.23 of the Disclosure Schedule accurately sets
forth, with respect to each insurance policy maintained by or at the expense
of, or for the direct or indirect benefit of, the Seller:   the name of the insurance carrier that
issued such policy. Part 2.23 of the Disclosure Schedule also identifies
each self-insurance or risk-sharing arrangement affecting the Seller or any of
the assets of the Seller. The Seller has delivered to the Purchaser accurate
and complete copies of all of the insurance policies identified in Part 2.23
of the Disclosure Schedule (including all renewals thereof and endorsements
thereto). Each of the policies identified or required to be identified in Part 2.23
of the Disclosure Schedule is valid, enforceable and in full force and effect,
and has been issued by an insurance carrier that, to the best of the Knowledge
of the Seller, is solvent, financially sound and reputable. All of the
information contained in the applications submitted in connection with said
policies was (at the times said applications were submitted) accurate and
complete, and all premiums and other amounts owing with respect to said
policies have been paid in full on a timely basis.

 

(b)                                  No insurance claim has been made by the
Seller since inception.  The Seller has
not received: (i) any notice or other communication (in writing or
otherwise) regarding the actual or possible cancellation or invalidation of any
of the policies identified in Part 2.23 of the Disclosure Schedule or
regarding any actual or possible adjustment in the amount of the premiums
payable with respect to any of said policies; (ii) any notice or other
communication (in writing or otherwise) regarding any actual or possible
refusal of coverage under, or any actual or possible rejection of any claim
under, any of the policies identified in Part 2.23 of the Disclosure
Schedule; or (iii) any indication that the issuer of any of the policies
identified in Part 2.23 of the Disclosure Schedule may be unwilling or
unable to perform any of its obligations thereunder.

 

2.24                        Related Party Transactions. No Related Party has any direct or indirect
interest of any nature in any of the Assets. No Related Party is, or has at any
time since December 31, 2003 been, indebted to the Seller.  Since December 31, 2004, no Related
Party has entered into, or has had any direct or indirect financial interest
in, any Seller Contract, transaction or business dealing of any nature
involving the Seller. To the Knowledge of Seller, no Related Party is
competing, or has at any time since December 31, 2004, competed, directly
or indirectly, with the Seller. No Related Party has any claim or right against
the Seller.

 

2.25                        Certain Payments, Etc. The Seller has not, and, to the Knowledge of
Seller, no officer, employee, agent or other Person associated with or acting
for or on behalf of the Seller has, at any time: (a) used any corporate
funds (i) to make any unlawful political contribution or gift or for any
other unlawful purpose relating to any political activity, (ii) to make
any unlawful payment to any governmental official or employee, or (iii) to
establish or maintain any unlawful or unrecorded fund or account of any nature;
(b) made any false or fictitious entry, or failed to make any entry that
should have 

 

20

 

been
made, in any of the books of account or other records of the Seller; (c) made
any payoff, influence payment, bribe, rebate, kickback or unlawful payment to
any Person; (d) performed any favor or given any gift which was not
deductible for federal income tax purposes; (e) made any payment (whether
or not lawful) to any Person, or provided (whether lawfully or unlawfully) any
favor or anything of value (whether in the form of property or services, or in
any other form) to any Person, for the purpose of obtaining or paying for (Y) favorable
treatment in securing business, or (Z) any other special concession; or (f) agreed,
committed or offered (in writing or otherwise) to take any of the actions
described in clauses “(a)” through “(e)” above.

 

2.26                        Proceedings; Orders. There is no pending Proceeding, and no Person
has, to the Knowledge of Seller, threatened to commence any Proceeding: (i) that
involves the Seller; or (ii) that challenges, or that may have the effect
of preventing, delaying, making illegal or otherwise interfering with, any of
the Transactions. To Seller’s Knowledge, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that might directly or
indirectly give rise to or serve as a basis for the commencement of any such
Proceeding No Proceeding has ever been commenced by or against the Seller. The
Seller has delivered to the Purchaser accurate and complete copies of all
pleadings, correspondence and other written materials (to which the Seller has
access) that relate to the Proceedings identified in Part 2.26 of
the Disclosure Schedule. There is no Order to which the Seller, or any of the
assets owned or used by the Seller, is subject; and, to the Knowledge of
Seller, no Related Party is subject to any Order that relates to the Seller’s
business or to any of the assets of the Seller. To the Knowledge of Seller, no
Continuing Employee is subject to any Order that may prohibit employee from
engaging in or continuing any conduct, activity or practice relating to the
business of the Seller or the business of the Purchaser at or after the
Closing. To Seller’s Knowledge, there is no proposed Order that, if issued or
otherwise put into effect, (Y) may have an adverse effect on the business,
condition, assets, liabilities, operations, financial performance, net income
or prospects of the Seller or on the ability of the Seller to comply with or
perform any covenant or obligation under any of the Transactional Agreements,
or (Z) may have the effect of preventing, delaying, making illegal or
otherwise interfering with any of the Transactions.

 

2.27                        Authority; Binding Nature of
Agreements.

 

(a)                                  The Seller has the requisite corporate power
and authority to enter into and to perform its obligations under each of the
Transactional Agreements to which it is a party; and the execution, delivery
and performance by the Seller of the Transactional Agreements to which it is a
party have been duly authorized by all necessary action on the part of the
Seller and its shareholders, board of directors and officers.  Assuming the due authorization, exeuction and
delivery by the other parties hereto, this Agreement and the other
Transactional Agreements to which Seller is a party constitute a valid and
binding obligation of the Seller, enforceable against the Seller in accordance
with respective terms, subject only to the effect, if any, of (i) applicable
bankruptcy and other similar laws affecting the rights of creditors generally
and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies (the “Enforceability Exception”).

 

(b)                                  Mitchell has the absolute and unrestricted
right, power and capacity to enter into and to perform his obligations under
each of the Transactional Agreements to which he is a party. Assuming the due
authorization, exeuction and delivery by the other parties hereto, this
Agreement and the other Transactional Agreements to which Mitchell is a party
constitute a valid and binding obligation of Mitchell, enforceable against
Mitchell in accordance with respective terms, subject only to the effect, if
any, of the Enforceability Exception.

 

21

 

2.28                        Non-Contravention; Consents. Neither the execution and delivery of any of
the Transactional Agreements, nor the consummation or performance of any of the
Transactions, will directly or indirectly (with or without notice or lapse of
time or both): (a) contravene, conflict with or result in a violation of,
or give any Governmental Body or other Person the right to challenge any of the
Transactions or to exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which any of the Seller, or any of the Assets, is
subject; (b) contravene, conflict with or result in a violation of any of
the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is to be included in the Assets; (c) contravene,
conflict with or result in a violation or breach of, or result in a default
under, any provision of any Seller Contract; (d) give any Person the right
to (i) declare a default or exercise any remedy under any Seller Contract,
(ii) accelerate the maturity or performance of any Seller Contract (other
than an Immaterial Contract), or (iii) cancel, terminate or modify any
Seller Contract (other than an Immaterial Contract); or (g) result in the
imposition or creation of any Encumbrance upon or with respect to any of the
Assets. The Seller is not and will not be required to make any filing with or
give any notice to, or to obtain any Consent from, any Person in connection
with the execution and delivery of any of the Transactional Agreements or the
consummation or performance of any of the Transactions that has not been
obtained prior to the Closing.

 

2.29                        Brokers. Seller has not agreed or become obligated to
pay, or has taken any action that might result in any Person claiming to be
entitled to receive, any brokerage commission, finder’s fee or similar
commission or fee in connection with any of the Transactions.

 

2.30                        Securities Law Matters.

 

(a)                                  The Seller is acquiring the Shares for its
own account and not with a present view toward the public sale or distribution
thereof and has no intention of selling or distributing any of such Shares or
any arrangement or understanding with any other Persons regarding the sale or
distribution of such Shares except as would not result in a violation of the
Securities Act of 1933, as amended (the “Securities Act”)
(it being understood and acknowledged by Purchaser that Seller intends to sell
the Liability Payoff Shares as soon as reasonably practicable pursuant to an
effective registration statement following the Closing). The Seller will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or
solicit any offers to buy, purchase or otherwise acquire or take a pledge of)
any of the Shares except pursuant to and in accordance with the Securities Act.
The Seller understands that the Shares are being offered and sold to it in
reliance upon specific exemptions from the registration requirements of the
United States and that the Purchaser is relying upon the truth and accuracy of,
and the Seller’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Seller set forth herein in order to
determine the availability of such exemptions and the eligibility of the Seller
to acquire the Shares. The Seller has been afforded the opportunity to ask
questions of the Purchaser in connection with this Agreement and the
Transactions.  The Seller acknowledges
and understands that its investment in the Shares involves a significant degree
of risk, including, without limitation: (i) an investment in the Purchaser
is speculative; (ii) the Seller may not be able to liquidate its
investment; (iii) the transferability of the Shares is limited; (iv) in
the event of a disposition of the Shares, the Seller could sustain the loss of
its entire investment; and (v) the Purchaser has not paid any dividends on
its Common Stock since inception and does not anticipate the payment of
dividends in the foreseeable future. Such risks are more fully set forth in the
Purchaser’s Annual Report on Form 10-K for the year ended December 31,
2006, as amended, and the Purchaser’s Quarterly Reports on Form 10-Q for
the quarters ended March 31, 2007, June 30, 2007 and September 30,
2007. The Seller is able to bear the economic risk of holding the Shares for an
indefinite period, and has knowledge and experience in financial and business
matters such that it is capable of evaluating the risks of the investment in
the Shares. The Seller understands that no federal or state agency or any other
government or governmental agency has passed upon or made any recommendation or
endorsement of the Shares or an investment therein.

 

22

 

(b)                                  The Seller understands that the Shares will
be issued at Closing and at the Additional Issuance Date in reliance upon Section 4(2) of
the Securities Act or any available rule or regulation promulgated
thereunder.

 

(c)                                  The Seller understands that the certificates
representing the Shares will bear restrictive legends in the following forms
(and a stop-transfer order may be placed against transfer of the certificates
for such Shares):

 

“THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, TRANSFERRED
OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD, PLEDGED,
HYPOTHECATED OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS. THE COMPANY SHALL BE ENTITLED TO
REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED TO THE EXTENT THAT SUCH OPINION IS REQUIRED
PURSUANT TO THAT CERTAIN ASSET PURCHASE AGREEMENT UNDER WHICH THE SECURITIES
WERE ISSUED.”

 

2.31                        Solvency of the Seller. The Seller is not now insolvent nor will it
be rendered insolvent by the Transactions. As used in this Section 2.31, “insolvent” means that the sum of
the liabilities of the Seller exceeds the present fair market value of the
Seller’s assets. Immediately after giving effect to the consummation of the
Transactions: (i) the Seller will be able to pay its liabilities as they
become due in the ordinary course of its business; (ii) the Seller will
not have unreasonably small capital with which to conduct its business
following the Closing; and (iii) the Seller will be able to satisfy any
judgments and other obligations to which it is subject, as well as any
judgments that are likely to arise as a result of any pending or threatened
litigation against it.

 

2.32                        Full Disclosure. None of the Transactional Agreements
contains any untrue statement of fact; and none of the Transactional Agreements
omits to state any fact necessary to make any of the representations,
warranties or other statements or information contained therein not misleading.

 

3.                                      REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER.

 

The Purchaser represents and warrants, to and
for the benefit of the Seller, as follows:

 

3.1                               Due Organization. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.

 

3.2                               Shares. The Shares have been duly authorized and,
when issued and delivered in accordance with the terms of this Agreement, will
be duly and validly issued, fully paid, and nonassessable, and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable federal and state securities laws.

 

3.3                               Authority; Binding Nature of
Agreements. The Purchaser
has the requisite corporate power and authority to enter into and to perform
its obligations under each of the Transactional Agreements to which it is a
party; and the execution, delivery and performance by the Purchaser of the 

 

23

 

Transactional
Agreements to which it is a party have been duly authorized by all necessary
action on the part of the Seller and its shareholders, board of directors and
officers.  Assuming the due
authorization, execution and delivery by the other parties hereto, this
Agreement and the other Transactional Agreements to which Purchaser is a party
constitute a valid and binding obligation of the Purchaser, enforceable against
the Purchaser in accordance with respective terms, subject only to the effect,
if any, of the Enforceability Exception.

 

3.4                               Proceedings; Orders. There is no pending Proceeding, and no
Person has, to the Knowledge of Purchaser, threatened to commence any
Proceeding: (i) that involves the Purchaser; or (ii) that challenges,
or that may have the effect of preventing, delaying, making illegal or
otherwise interfering with, any of the Transactions.

 

3.5                               Non-Contravention; Consents. Neither the execution and delivery of any of
the Transactional Agreements, nor the consummation or performance of any of the
Transactions, will directly or indirectly (with or without notice or lapse of
time or both): (a) contravene, conflict with or result in a violation of,
or give any Governmental Body or other Person the right to challenge any of the
Transactions or to exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which Purchaser, is subject; or (b) contravene,
conflict with or result in a violation or breach of, or result in a default
under, any provision of any material Contract to which Purchaser is party or by
which its properties are bound.  The
Purchaser is not and will not be required to make any filing with or give any
notice to, or to obtain any Consent from, any Person in connection with the
execution and delivery of any of the Transactional Agreements or the
consummation or performance of any of the Transactions that has not been
obtained prior to the Closing, provided, however that Purchaser may make all
filings that are required to comply with federal and state securities laws, and
AMEX.

 

3.6                               Brokers. The Purchaser has not become obligated to
pay, and has not taken any action that might result in any Person claiming to
be entitled to receive, any brokerage commission, finder’s fee or similar
commission or fee in connection with any of the Transactions.

 

4.                                      INDEMNIFICATION, ETC.

 

4.1                               Survival of Representations and
Covenants.

 

(a)                                  The representations, warranties, covenants
and obligations of each party to this Agreement shall survive (without
limitation): (i) the Closing and the sale of the Assets to the Purchaser; (ii) any
sale or other disposition of any or all of the Assets by the Purchaser; and (iii) the
death or dissolution of any party to this Agreement.  Subject to Section 4.1(b) and
except in the case of fraud or intentional misrepresentation, all
representations and warranties contained in this Agreement shall survive until,
and shall terminate upon, the expiration of the one-year anniversary of the
Closing (the “Indemnification Deadline”);
it being understood that in the event notice of any claim for indemnification
under Section 4.2 has been given prior to the Indemnification Deadline,
the representations and warranties that are the subject of such indemnification
claim shall survive with respect to such claim until such time as such claim is
finally resolved, either by means of (x) a written settlement agreement
executed on behalf of the Seller Representative and the Purchaser, (y) a
final, non-appealable order or judgment issued by a court of competent
jurisdiction, or (z) a final, non appealable determination rendered by an
arbitration or like panel to which the parties have agreed to submit such
matter. The right to indemnification, payment of Damages or other remedy based
on the representations, warranties, covenants, and obligations contained in
this Agreement will not be affected by any Knowledge acquired with respect to
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant or obligation.  For
purposes of this Agreement, each statement or other item of information set
forth in the Disclosure Schedule shall be deemed to be a representation and
warranty made by the Seller in this Agreement.

 

24

 

(b)                                  Notwithstanding anything to the contrary, and
without limiting the generality of anything contained in Section 4.1(a), (i) if
Mitchell or the Seller had Knowledge, at or prior to the Closing, of any
circumstance that constitutes a Breach of any representation or warranty set
forth in Section 2, or (ii) if the Purchaser had Knowledge, at or
prior to the Closing, of any circumstance that constitutes a Breach of any
representation or warranty set forth in Section 3, then in either case such
representation or warranty shall not expire, but rather shall remain in full
force and effect for an unlimited period of time (regardless of whether any
claim relating to such representation or warranty has been made).  For purposes of this Agreement, each
statement or other item of information set forth in the Disclosure Schedule
shall be deemed to be a representation and warranty made by Mitchell and the
Seller in this Agreement.

 

4.2                               Indemnification by the Seller.

 

(a)                                  The Seller shall hold harmless and indemnify
each of the Purchaser Indemnitees from and against, and shall pay, compensate
and reimburse each of the Purchaser Indemnitees for, any Damages that are
suffered or incurred by any of the Purchaser Indemnitees or to which any of the
Purchaser Indemnitees may otherwise become subject at any time (regardless of
whether or not such Damages relate to any third-party claim) and that arise
from or as a result of, or are connected with:

 

(i)                                    any Breach of any representation or warranty
made by the Seller in any Transactional Agreement (including this Agreement)
and the Disclosure Schedule as of the date of this Agreement (without giving
effect to any qualification as to materiality contained or incorporated in such
representation or warranty);

 

(ii)                                any Breach of any covenant or obligation of
the Seller contained in any of the Transactional Agreements (other than the Registration
Rights Agreement);

 

(iii)                            any Liability of the Seller or of any Related Party, other
than the Assumed Liabilities;

 

(iv)                               any Liability (other than the Assumed Liabilities) to
which the Purchaser or any of the other Purchaser Indemnitees may become
subject and that arises from or relates to (A) any product produced or
sold or any services performed by or on behalf of the Seller, (B) the
presence of any Hazardous Material at any site owned, leased, occupied or
controlled by the Seller on or at any time prior to the Closing, (C) the
generation, manufacture, production, transportation, importation, use,
treatment, refinement, processing, handling, storage, discharge, release or
disposal of any Hazardous Material (whether lawfully or unlawfully) by or on
behalf of the Seller, (D) any failure to comply with any bulk transfer
law, fraudulent transfer law or similar Legal Requirement in connection with
any of the Transactions, (E) WARN or any similar state or local Legal
Requirement that may result from an “Employment Loss,” as defined by 29 U.S.C.
sect. 2101(a)(6), caused by any action of the Seller prior to the Closing or by
the Purchaser’s decision not to hire previous employees of the Seller, (F) any
Seller Employee Plan, profit sharing plan or dental plan, employment agreement,
severance agreement, change in control agreement, whether or not written,
between the Seller and any Person, (G) 280G payments and excise taxes,
sales bonuses and other retention arrangements established by the Seller or the
loss of any tax benefits, deductions or credits by or on behalf of the
Purchaser as a result of the foregoing and (H) the failure of the Seller
to qualify to transact business in Arizona at any time prior the Closing during
which the Seller was required to so qualify;

 

25

 

(v)                                   any Proceeding relating directly or
indirectly to any Breach, alleged Breach, Liability or matter of the type
referred to in clause “(i),” “(ii),” “(iii),” or “(iv)” above (including any Proceeding commenced by any Purchaser
Indemnitee for the purpose of enforcing any of its rights under this Section 4);
or

 

(vi)                               any claim by any Person that such Person has
any rights in or to the Intellectual Property and Intellectual Property Rights
transferred to Buyer pursuant to Section 1.1.

 

(b)                                  Seller shall not be required to make any
indemnification payment pursuant to Section 4.2(a)(i) for any Breach
as set forth in such Section until such time as the total amount of all
Damages (including the Damages arising from such Breach and all other Damages
arising from any other Breaches of its representations or warranties) that have
been suffered or incurred by any one or more of the Purchaser Indemnitees, or
to which any one or more of the Purchaser Indemnitees has or have otherwise
become subject, exceeds $25,000.  If the
total amount of such Damages exceeds the $25,000, the Purchaser Indemnitees
shall be entitled to be indemnified against and compensated and reimbursed for
only that amount that exceeds $25,000.

 

(c)                                  Notwithstanding anything herein to the
contrary:

 

(i)                                    recovery from the Indemnification Escrow
Shares shall be the sole and exclusive remedy for the indemnity obligations
under the Agreement for the matters set forth in Section 4.2(a)(i) and
Section 4.2(a)(v) (but only to the extent that such Section 4.2(a)(v) relates
to a Proceeding related to Section 4.2(a)(i)); and

 

(ii)                                recovery of the Shares from Seller (including
the Indemnification Escrow Shares and the Reimbursement Escrow Shares) shall be
the sole and exclusive remedy for the indemnity obligations under this
Agreement for matters set forth in Sections 4.2(a)(ii), 4.2(a)(iii),
4.2(a)(iv), 4.2(a)(v), and 4.2(a)(vi) (but only to the extent that such Section 4.2(a)(v) relates
to a Proceeding related to Sections 4.2(a)(ii), 4.2(a)(iii), 4.2(a)(iv) and
4.2(a)(vi)); provided, that, the Purchaser
Indemnitees shall only be entitled to make a claim for Damages pursuant to Section 4.2(a)(vi) until
the one year anniversary of the Closing.

 

(d)                                  Nothing in this Section 4 shall prevent
Purchaser from bringing a common law action for fraud or intentational
misrepresentation against any Person whose own fraud or intentional
misrepresentation has caused Purchaser to incur indemnifiable Damages or limit
the indemnifiable Damages recoverable by Purchaser in such common law action; provided, that, no Indemitee shall be entitled to recover
more than once for the same idemnifiable Damages.

 

4.3                               Indemnification by the Purchaser.

 

(a)                                  The Purchaser shall hold harmless and
indemnify the Seller from and against, and shall compensate and reimburse the
Seller for, any Damages that are suffered or incurred by the Seller or to which
the Seller may otherwise become subject at any time (regardless of whether or
not such Damages relate to any third-party claim) and that arise from or as a
result of, or are connected with:

 

(i)                                    any Breach of any representation or warranty made by
the Purchaser in this Agreement; or

 

(ii)                                any Proceeding relating directly or indirectly to any
failure or Breach of the type referred to in clause “(i)” above (including any
Proceeding commenced by the Seller for the purpose of enforcing its rights
under this Section 4.3).

 

26

 

(b)                                  The Purchaser shall not be required to make
any indemnification payment pursuant to Section 4.3(a) for any Breach
of any of its representations and warranties until such time as the total
amount of all Damages (including the Damages arising from such Breach and all
other Damages arising from any other Breaches of its representations or
warranties) that have been directly or indirectly suffered or incurred by the Seller,
or to which the Seller have otherwise become subject, exceeds $25,000 in the
aggregate; provided that this limitation shall not apply to any Breach arising
directly or indirectly from any circumstance of which the Purchaser had
Knowledge at or prior to the Closing. If the total amount of such Damages
exceeds $25,000 in the aggregate, the Seller shall be entitled to be
indemnified against and compensated and reimbursed for only that amount that
exceeds $25,000.) Notwithstanding anything herein to the contrary, the
Purchaser shall have the right, in its sole discretion, to satisfy any payment
obligation pursuant to this Section 4.3 by delivering that number of
shares of Common Stock obtained by dividing (a) the amount payable by the
Purchaser under this Section 4.3, by (b) the volume weighted average
closing price of the Common Stock over the 20 trading-day period ending on the
date immediately preceding the Indemnification Determination Date, as reported
on AMEX, and, if the Common Stock is not quoted on AMEX at any time during such
period, as reported on the OTCBB or the Pink Sheets for the portion of such
period that the Common Stock is listed or quoted on the OTCBB or the Pink
Sheets.

 

4.4                               Value of Escrow Shares.  For
the purposes of this Section 4, the price per share attributable to the
Shares shall be the volume weighted average closing price of the Common Stock over
the 20 trading-day period ending on the date immediately preceding the
Indemnification Determination Date, as reported on AMEX, and, if the Common
Stock is not quoted on AMEX at any time during such period, as reported on the
OTCBB or the Pink Sheets for the portion of such period that the Common Stock
is listed or quoted on the OTCBB or the Pink Sheets.

 

4.5                               Setoff. In addition to any rights of setoff or other
rights that the Purchaser or any of the other Purchaser Indemnitees may have at
common law or otherwise, subject to and in accordance with the provisions of
this Section 4, the Purchaser shall have the right to setoff and deduct any
sum that may be owed to any Purchaser Indemnitee under this Section 4 from
the  Escrow Shares.

 

4.6                               Defense of Third Party Claims. In the event of the assertion or
commencement by any Person (other than Purchaser or the Seller) of any
Proceeding (whether against the Purchaser, Seller or against any other Person)
with respect to which any Person (a “Third Party Claim
Indemnitee”) may be entitled to indemnification, compensation or
reimbursement pursuant to this Section 4, each Third Party Claim
Indemnitee shall have the right, at its election, to proceed with the defense
of such Proceeding on its own; provided, however,
that the Third Party Claim Indemnitee may not settle or compromise any such
Proceeding without the prior written consent of the indemnifying party (which
consent shall not be unreasonably withheld), unless such settlement or
compromise includes a full release of Liability with respect to the
indemnifying party; and provided further
that such settlement or compromise shall not be conclusive evidence of the
amount of Damages incurred by the Third Party Claim Indemnitee in connection
with such Proceeding. All reasonable expenses relating to the defense of such
claim or Proceeding shall be borne and paid exclusively by the indemnifying
party if the indemnifying party is obligated to otherwise indemnify the Third
Party Claim Indemnitee under this Section 4. The indemnifying party shall
make available to the Third Party Claim Indemnitee any documents and materials
in its possession or control that may be necessary to the defense of such claim
or Proceeding. The Third Party Claim Indemnitee shall give the indemnifying
party prompt notice after it becomes aware of the commencement of any such
Proceeding against the Third Party Claim Indemnitee; provided,
however, any failure on the part of the Third Party Claim Indemnitee
to so notify the indemnifying party shall not limit any of the obligations of
the indemnifying party, or any of the rights of any Third Party Claim
Indemnitee, under this Section 4  (except to the
extent such failure materially prejudices the defense of such Proceeding). If
the Third Party Claim Indemnitee does not elect to proceed with the defense of 

 

27

 

any
such Proceeding, the indemnifying party may proceed with the defense of such
Proceeding; provided, however, that the indemnifying
party may not settle or compromise any such Proceeding without the prior
written consent of the Third Party Claim Indemnitee (which consent may not be
unreasonably withheld) unless such settlement includes a full release of
Liability with respect to the Third Party Claim Indemnitee.

 

4.7                               Exercise of Remedies by Purchaser
Indemnitees other than the Purchaser. No Purchaser Indemnitee (other than the Purchaser or any successor
thereto or assign thereof) shall be permitted to assert any indemnification
claim or exercise any other remedy under this Agreement unless the Purchaser
(or any successor thereto or assign thereof) shall have consented to the
assertion of such indemnification claim or the exercise of such other remedy.

 

4.8                               Escrow. Upon the one-year anniversary of the date of
the Closing, in accordance with the terms of the Escrow Agreement, the Escrow
Agent shall release from the Escrow Account the Escrow Shares that are not
subject to any claims made pursuant to setoff or indemnification pursuant to
this Section 4 (whether or not such claims have been determined to be
valid as of such date, provided that such remaining Indemnification Escrow
Shares shall be so released as soon as and to the extent that any such claim
has been determined not to be valid).

 

4.9                               Exclusive Remedy. 
This Section 4
shall provide the sole and exclusive remedy with respect to any and all claims
relating to the subject matter of this Agreement and the other Transactional
Agreements to which Purchaser is a party.

 

5.                                      CERTAIN COVENANTS.

 

5.1                               Further Actions. From and after the Closing, the Seller shall
cooperate with the Purchaser and the Purchaser’s affiliates and
Representatives, and shall execute and deliver such documents and take such
other actions as the Purchaser may reasonably request, for the purpose of
evidencing the Transactions and placing the Purchaser in possession and control
of all of the Assets.  Without limiting
the generality of the foregoing, from and after the Closing, the Seller shall
promptly remit to the Purchaser any funds that are received by the Seller and
that are included in, or that represent payment of receivables included in, the
Assets. The Seller: (a) hereby irrevocably authorizes the Purchaser, at
all times on and after the Closing, to endorse in the name of the Seller any
check or other instrument that is made payable to the Seller and that
represents funds included in, or that represents the payment of any receivable
included in, the Assets; and (b) hereby irrevocably nominates, constitutes
and appoints the Purchaser as the true and lawful attorney-in-fact of the
Seller (with full power of substitution) effective as of the Closing, and
hereby authorizes the Purchaser, in the name of and on behalf of the Seller, to
execute, deliver, acknowledge, certify, file and record any document, to
institute and prosecute any Proceeding and to take any other action (on or at
any time after the Closing) that the Purchaser may deem appropriate for the
purpose of (i) collecting, asserting, enforcing or perfecting any claim,
right or interest of any kind that is included in or relates to any of the
Assets, (ii) defending or compromising any claim or Proceeding relating to
any of the Assets, or (iii) otherwise carrying out or facilitating any of
the Transactions. The power of attorney referred to in the preceding sentence
is and shall be coupled with an interest and shall be irrevocable, and shall
survive the dissolution, bankruptcy or insolvency of the Seller.

 

5.2                               Publicity. Seller shall ensure that, on and at all
times at and after the Closing: (a) no press release or other publicity
concerning any of the Transactions is issued or otherwise disseminated by or on
behalf of the Seller without the Purchaser’s prior written consent; (b) the
Seller continues to keep the terms of this Agreement and the other
Transactional Agreements strictly confidential (provided,
that, the terms of this Agreement may be disclosed to the shareholders
of the Seller and such shareholders may 

 

28

 

communicate
the existence of the transaction and consideration paid in the transaction to
its general and limited partners); and (c) except as permitted in
subsection (b), the Seller keep strictly confidential, and the Seller does not
use or disclose to any other Person, any non-public document or other
information that relates directly or indirectly to the business of the Seller,
the Purchaser or any affiliate of the Purchaser, except (i) with respect
to such information has been previously made publicly available by the
Purchaser and (ii) to the extent the Seller is required by law to make
such disclosure (in which case the Seller shall advise the Purchaser at least
five business days before making such disclosure of the nature and content of
the intended disclosure.

 

5.3                               Change of Name. As promptly as practicable after the
Closing, the Seller shall change its name to a name that does not include the
words “Sol Logic” or any variation thereof and that is reasonably satisfactory
to the Purchaser.

 

5.4                               Lock-up Agreement. Without the prior written consent of the
Purchaser, the Seller will not, during the period commencing at the Closing and
ending on the one-year anniversary of the date of the Closing, directly or
indirectly: (1) offer, sell, contract to sell, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise distribute, dividend,
transfer or dispose of any Shares to any Person (including to any Shareholder);
or (2) enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of the Shares,
or any securities convertible into or exchangeable for the Shares, regardless
of whether any such transaction described herein is to be settled by delivery
of the Shares or such other securities, or by delivery of cash or otherwise.
Notwithstanding the foregoing, the restrictions on the Seller described in this
Section 5.4 shall not apply with respect to the Liability Payoff
Shares.  The Seller hereby agrees and
consents to the entry of stop transfer instructions with the Purchaser’s
transfer agent against the transfer of the Shares, except in compliance with
this Section 5.4.

 

5.5                               Employee Matters. The Seller shall be responsible for
providing or discharging any and all notifications, benefits and liabilities to
its employees and governmental authorities required by WARN or by any other
applicable Legal Requirement relating to plant closings or employee separations
or severance pay that are required to be provided before the Closing as a
result of the Transactions. Following the Closing, the Seller shall comply with
COBRA or similar state statutes with respect to all current and former
employees of the Seller.

 

5.6                               Payment of All Taxes Resulting
from Sale of Assets by Seller.
The Seller shall pay in a timely manner all Taxes resulting from or payable in connection
with the sale of the Assets pursuant to this Agreement, regardless of the
Person on whom such Taxes are imposed by Legal Requirements.  Prior to and after the Closing, the Seller
shall cooperate with the Purchaser to comply with all applicable provisions of
state tax laws that, in the absence of such compliance, would hold the
Purchaser liable for unpaid Taxes of the Seller. Within one year following the
Closing or at such time as required by applicable Legal Requirements, the
Seller shall deliver to the Purchaser tax clearance certificates from such
states for all such state Taxes.

 

5.7                               Nonsolicitation of Employees. Beginning on the date hereof and ending on
the third anniversary of the date of the Closing (the “No-Solicit
Period”), the Seller shall not solicit or cause to be solicited
any employee, consultant or other agent of the Purchaser to leave employment or
service with the Purchaser; provided that
this Section 5.7 will not apply to general solicitations of employment or
service not specifically directed toward the Purchaser’s employees, consultants
or other agents.

 

29

 

5.8                               Restrictions on Competition. During the No-Solicit Period, the Seller,
without the prior written consent of the Purchaser: (a) engage in any
aspect of business related to multi-lingual communications, automatic speech
recognition (ASR), machine translation (MT) and text to speech (TTS)
technologies (the “Business”) anywhere in the
world; or (b) participate in, invest in, provide services to or otherwise
deal with any Person that engages, or has plans to engage, directly or
indirectly in any aspect of the Business anywhere in the world; provided, however, that (i) any venture capital firms
that are affiliates of the Seller are not subject to the restrictions set forth
in this Section 5.8; and (ii) this Section 5.8 shall not
prohibit any Person that is then engaged in activities substantially similar to
the Business from investing or proposing to invest in the Seller, or acquiring
all of the stock or all or substantially all of the assets of the Seller,
during the No-Solicit Period, so long as no information relating to the
Business or the Assets is provided or disclosed by the Seller or its
Representatives, directly or indirectly, to such Person.

 

5.9                               No Interference with Customers. During the No-Solicit Period, the Seller
shall not, for itself or on behalf of any other Person: (a) induce or
attempt to induce any customer to cease doing business with the Purchaser or
any of the Purchaser’s subsidiaries or reduce the volume of business transacted
by such customer with the Purchaser or any of the Purchaser’s subsidiaries; or (b) solicit
the business of any Person known to the Seller to be a customer of the
Purchaser or any of the Purchaser’s subsidiaries, with respect to the Business
or the Assets; provided, however, that this Section 5.9
shall not prohibit any Person that is then engaged in activities substantially
similar to the Business from investing or proposing to invest in the Seller, or
acquiring all of the stock or all or substantially all of the assets of the
Seller, during the No-Solicit Period, so long as no information relating to the
Business or the Assets is provided or disclosed by the Seller or its
Representatives, directly or indirectly, to such Person.

 

5.10                        Customer and Other Business
Relationships. From and
after the Closing, the Seller shall promptly satisfy the Liabilities of the
Seller (other than the Assumed Liabilities) in a manner that is not detrimental
to any of the ongoing relationships of the Business.

 

5.11                        Payment of Other Retained
Liabilities. In addition to
payment of Taxes pursuant to Section 5.6, the Seller shall pay, or make
adequate provision for the payment reasonably acceptable to the Purchaser, in
full all of the Liabilities existing as of the Closing other than the Assumed
Liabilities (the “Retained Liabilities”). If
any such Retained Liabilities are not so paid or provided for, or if the
Purchaser reasonably determines that failure to make any payments will impair
the Purchaser’s use or enjoyment of the Assets or conduct of the Business
previously conducted by the Seller with the Assets, the Purchaser may, at any
time at or prior to the one-year anniversary of the date of the Closing, elect
to make all such payments directly (but shall have no obligation to do so) and
setoff and deduct the full amount of all such payments (each, a “Purchaser Payment”) from that
number of Reimbursement Escrow Shares obtained by dividing the (a) amount
of each Purchaser Payment, by (b) the volume weighted average closing
price of the Common Stock over the 20 trading-day period ending on the date
immediately preceding the date of such Purchaser Payment, as reported on AMEX,
and, if the Common Stock is not quoted on AMEX at any time during such period,
as reported on the OTCBB or the Pink Sheets for the portion of such period that
the Common Stock is listed or quoted on the OTCBB or the Pink Sheets; provided that
the Purchaser shall not be permitted to set off and deduct the amount of any
such Purchaser Payment from the Reimbursement Escrow Shares until 30 days after
the Registration Statement is declared effective by the SEC. The setoff and
deduction of any such sum shall operate for all purposes as a complete discharge
(to the extent of such sum) of the obligation to pay the amount, in the form of
the issuance of the Shares to the Seller, from which the sum was set off and
deducted.

 

5.12                        Restrictions on Seller
Dissolution and Distributions. The  Seller shall not dissolve or make any distribution of the
Shares or of the proceeds received from the sale of the Shares (other than with
respect to the Liability Payoff Shares) by or on behalf of the Seller until the
one year anniversary following the Closing.

 

30

 

5.13                        Acknowledgment Regarding Payable.  The
Purchaser acknowledges that the payable owed by the Seller to the Purchaser in
the amount of $25,000 has been extinguished and satisfied in full.

 

6.                                      MISCELLANEOUS PROVISIONS.

 

6.1                               Seller Representative.

 

(a)                                  The Seller hereby irrevocably nominates,
constitutes and appoints Wink Jones as the agent and true and lawful
attorney-in-fact of the Seller (the “Seller Representative”),
with full power of substitution, to act in the name, place and stead of the
Seller for purposes of executing any documents and taking any actions that the
Seller Representative may, in his sole discretion, determine to be appropriate
in connection with any of the Transactional Agreements or any of the Transactions.
Wink Jones hereby accepts his appointment as Seller Representative.

 

(b)                                  Seller 
hereby grants to the Seller Representative full authority to execute,
deliver, acknowledge, certify, file and record on behalf of the Seller (in the
name of the Seller  or otherwise) any and
all documents that the Seller Representative may, in his sole discretion,
determine to be appropriate, in such forms and containing such provisions as
the Seller Representative may, in his sole discretion, determine to be appropriate
(including any amendment to or waiver of rights under any of the Transactional
Agreements). Notwithstanding anything to the contrary contained in any of the
Transactional Agreements: (i) the Purchaser shall be entitled to deal
exclusively with the Seller Representative on all matters relating to the
respective Transactional Agreements and the Transactions (including all matters relating to any notice to, or
any Consent to be given or action to be taken by, the Seller); and (ii) each
Purchaser Indemnitee shall be entitled to rely conclusively (without further
evidence of any kind whatsoever) on any document executed or purported to be
executed on behalf of the Seller by the Seller Representative, and on any other
action taken or purported to be taken on behalf of the Seller by the Seller
Representative, as fully binding upon the Seller.

 

(c)                                  Seller hereby, recognizes and intends that
the power of attorney granted in Section 7.1(a): (i) is coupled with
an interest and is irrevocable; (ii) may be delegated by the Seller
Representative; and (iii) shall survive any dissolution of the Seller.

 

(d)                                  If the Seller Representative shall die,
become disabled or otherwise be unable to fulfill his responsibilities
hereunder, the Seller, within ten days after such death or disability, shall
appoint a successor to the Seller Representative and immediately thereafter
notify the Purchaser of the identity of such successor. Any such successor
shall succeed the Seller Representative as Seller Representative hereunder. No
Seller Representative shall resign until a successor representative shall have
been appointed.

 

(e)                                  The Seller Representative shall not be liable
to Seller for any act done or omitted hereunder as the Seller Representative
while acting in good faith (and any act done or omitted pursuant to the advice
of counsel shall be conclusive evidence of such good faith) and without gross
negligence or willful misconduct. All losses, liabilities and expenses incurred
by the Seller Representative in connection with the performance of its duties
as Seller Representative shall be borne and paid exclusively by the
Seller.  If not paid directly to the
Seller Representative by the Seller, such losses, liabilities and expenses may
be recovered by the Seller Representative from the Escrow Shares otherwise
distributable to the Seller (and not distributed or distributable to a
Purchaser Indemnitee).

 

31

 

6.2                               Further Assurances. Each party hereto shall execute and/or cause
to be delivered to each other party hereto such instruments and other
documents, and shall take such other actions, as such other party may
reasonably request (at or after the Closing) for the purpose of carrying out or
evidencing any of the Transactions.

 

6.3                               Fees and Expenses.

 

(a)                                  The Seller shall bear and pay all fees, costs
and expenses (including all legal fees and expenses payable to Cooley Godward
Kronish LLP and any other counsel to the Seller) that have been incurred or
that are in the future incurred by, on behalf of or for the benefit of the
Seller in connection with: (i) the negotiation, preparation and review of
any letter of intent or similar document relating to any of the Transactions; (ii) the
investigation and review conducted by the Purchaser and its Representatives
with respect to the business of the Seller (and the furnishing of information
to the Purchaser and its Representatives in connection with such investigation
and review); (iii) the negotiation, preparation and review of this
Agreement (including the Disclosure Schedule), the other Transactional
Agreements and all bills of sale, assignments, certificates, opinions and other
instruments and documents delivered or to be delivered in connection with the
Transactions; (iv) the preparation and submission of any filing or notice
required to be made or given in connection with any of the Transactions, and
the obtaining of any Consent required to be obtained in connection with any of
the Transactions; and (v) the consummation and performance of the Transactions.

 

(b)                                  The Purchaser shall bear and pay all fees,
costs and expenses (including all legal fees and expenses payable to Paul,
Hastings, Janofsky & Walker LLP) that have been incurred or that are
in the future incurred by or on behalf of the Purchaser in connection with: (i) the
negotiation, preparation and review of any letter of intent or similar document
relating to any of the Transactions; (ii) the investigation and review
conducted by the Purchaser and its Representatives with respect to the business
of the Seller; (iii) the negotiation, preparation and review of this
Agreement, the other Transactional Agreements and all bills of sale,
assignments, certificates, opinions and other instruments and documents
delivered or to be delivered in connection with the Transactions; and (iv) the
consummation and performance of the Transactions.

 

6.4                               Attorneys’ Fees. If any legal action or other legal
proceeding relating to any of the Transactional Agreements or the enforcement
of any provision of any of the Transactional Agreements is brought against any
party to this Agreement, the prevailing party shall be entitled to recover
reasonable attorneys’ fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).

 

6.5                               Notices. Any notice or other communication required
or permitted to be delivered to any party under this Agreement shall be in
writing and shall be deemed properly delivered, given and received when
delivered (by hand, by registered mail, by courier or express delivery service
or by facsimile) to the address or facsimile telephone number set forth beneath
the name of such party below (or to such other address or facsimile telephone
number as such party shall have specified in a written notice given to the other
parties hereto)(1):

 

	
  if to the Seller
  Representative:

  
	
   

  
	
   

  	
  Wink Jones, as agent of the Seller 

  1020 West Main St., Suite 100J 

  Boise, ID, 83702 

  Facsimile: 303-484-5397

  

 

(1) Allow for delivery of notice via
electronic mail?

 

32

 

	
  if
  to the Seller or Mitchell:

  
	
   

  
	
   

  	
  Sol Logic, Inc. 

  PMB 472 

  1396 Willow Creek Rd STE
  A103 

  Prescott, AZ 86301 

  Attn: Frank Mitchell 

  Facsimile: 877-819-9359

  
	
   

  	
   

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

  
	
   

  
	
   

  	
  Cooley
  Godward Kronish LLP  

  380
  Interlocken Crescent, Suite 900  

  Broomfield,
  CO 80021  

  Attn:
  Laura M. Medina  

  Facimile:
  720-566-4099

  
	
   

  	
   

  
	
  if to the Purchaser:
  

  
	
   

  
	
   

  	
  ImageWare
  Systems, Inc. 

  10883
  Thornmint Road 

  San
  Diego, CA 92127 

  Facsimile:
  858-673-1770

  
	
   

  	
   

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

  
	
   

  
	
   

  	
  Paul,
  Hastings, Janofsky & Walker LLP 

  3579
  Valley Centre Drive 

  San
  Diego, CA 92130 

  Attn:
  Carl R. Sanchez 

  Facsimile:
  858-720-2555

  

 

6.6                               Time of the Essence.  Time
is of the essence of this Agreement.

 

6.7                               Headings. The underlined headings contained in this
Agreement are for convenience of reference only, shall not be deemed to be a
part of this Agreement and shall not be referred to in connection with the
construction or interpretation of this Agreement.

 

6.8                               Counterparts. This Agreement may be executed in one or
more counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement. Signatures of the parties transmitted by facsimile
shall be deemed to be their original signatures for all purposes.

 

6.9                               Governing Law; Venue. This Agreement shall be construed in
accordance with, and governed in all respects by, the internal laws of the
State of California (without giving effect to principles of conflicts of laws).
The Seller agrees that, if any Proceeding is commenced against any Purchaser
Indemnitee by any Person in or before any court or other tribunal anywhere in the
world, then such Purchaser Indemnitee may proceed against the Seller in or
before such court or other tribunal with respect to any indemnification claim
or other claim arising directly or indirectly from or relating directly or 

 

33

 

indirectly
to such Proceeding or any of the matters alleged therein or any of the
circumstances giving rise thereto. The Seller irrevocably constitutes and
appoints the Seller Representative as its agent to receive service of process
in connection with any legal proceeding relating to this Agreement or any other
Transactional Agreement or the enforcement of any provision of this Agreement
or any other Transactional Agreement.

 

6.10                        Successors and Assigns; Parties
in Interest. This Agreement
shall be binding upon: the Seller and its successors and assigns (if any); and
the Purchaser and its successors and assigns (if any). This Agreement shall
inure to the benefit of: the Seller; the Purchaser; the other Purchaser
Indemnitees (subject to Section 4.6); and the respective successors and
assigns (if any) of the foregoing. The Purchaser may freely assign any or all
of its rights under this Agreement (including its indemnification rights under Section 4),
in whole or in part, to any other Person without obtaining the consent or
approval of any other Person. Seller shall not be permitted to assign any of
its rights or delegate any of its obligations under this Agreement without the
Purchaser’s prior written consent. Except for the provisions of Section 4,
none of the provisions of this Agreement is intended to provide any rights or
remedies to any Person other than the parties to this Agreement and their
respective successors and assigns (if any). Without limiting the generality of
the foregoing, (i) no employee of the Seller shall have any rights under
this Agreement or under any of the other Transactional Agreements, and (ii) no
creditor of the Seller shall have any rights under this Agreement or any of the
other Transactional Agreements.

 

6.11                        Remedies Cumulative; Specific
Performance. The rights and
remedies of the parties hereto shall be cumulative (and not alternative).  The Seller agrees that: (a) in the event
of any Breach or threatened Breach by Seller of any covenant, obligation or
other provision set forth in this Agreement, the Purchaser shall be entitled
(in addition to any other remedy that may be available to it) to (i) a
decree or order of specific performance or mandamus to enforce the observance
and performance of such covenant, obligation or other provision, and (ii) an
injunction restraining such Breach or threatened Breach; and (b) neither
the Purchaser nor any other Purchaser Indemnitee shall be required to provide
any bond or other security in connection with any such decree, order or
injunction or in connection with any related action or Proceeding. The
Purchaser agrees that: (A) in the event of any Breach or threatened Breach
by the Purchaser of any covenant, obligation or other provision set forth in
this Agreement, the Seller shall be entitled (in addition to any other remedy
that may be available to it) to (I) a decree or order of specific
performance or mandamus to enforce the observance and performance of such
covenant, obligation or other provision, and (II) an injunction
restraining such Breach or threatened Breach; and (B) the Seller shall not
be required to provide any bond or other security in connection with any such
decree, order or injunction or in connection with any related action or
Proceeding.

 

6.12                        Waiver. No failure on the part of any Person to
exercise any power, right, privilege or remedy under this Agreement, and no
delay on the part of any Person in exercising any power, right, privilege or
remedy under this Agreement, shall operate as a waiver of such power, right,
privilege or remedy; and no single or partial exercise of any such power,
right, privilege or remedy shall preclude any other or further exercise thereof
or of any other power, right, privilege or remedy. No Person shall be deemed to
have waived any claim arising out of this Agreement, or any power, right,
privilege or remedy under this Agreement, unless the waiver of such claim,
power, right, privilege or remedy is expressly set forth in a written
instrument duly executed and delivered on behalf of such Person; and any such
waiver shall not be applicable or have any effect except in the specific
instance in which it is given.

 

6.13                        Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of the Purchaser and the Seller
Representative.

 

34

 

6.14                        Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction. If the final judgment of a
court of competent jurisdiction declares that any term or provision hereof is
invalid or unenforceable, the parties hereto agree that the court making such
determination shall have the power to limit the term or provision, to delete
specific words or phrases, or to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified. In the event
such court does not exercise the power granted to it in the prior sentence, the
parties hereto agree to replace such invalid or unenforceable term or provision
with a valid and enforceable term or provision that will achieve, to the extent
possible, the economic, business and other purposes of such invalid or
unenforceable term.

 

6.15                        Entire Agreement. The Transactional Agreements set forth the
entire understanding of the parties relating to the subject matter thereof and
supersede all prior agreements and understandings among or between any of the
parties relating to the subject matter thereof.

 

6.16                        Construction. For purposes of this Agreement, whenever
the context requires: the singular number shall include the plural, and vice
versa; the masculine gender shall include the feminine and neuter genders; the
feminine gender shall include the masculine and neuter genders; and the neuter
gender shall include the masculine and feminine genders. All of the parties to
this Agreement have participated jointly in the negotiation and drafting of
this Agreement. In the event any ambiguity or question of interpretation
arises, this Agreement, the other Transactional Agreements and the other
documents and instruments executed in connection with this Agreement shall be
construed as if drafted jointly, and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any
provision of this Agreement, the other Transactional Agreements or such other
documents and instruments. The language used in this Agreement and the other
Transactional Agreements shall be deemed to be the language chosen by the
parties hereto to express their mutual intent, and no rule of strict
construction shall be applied against any Person. The parties hereto intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
party has not breached shall not detract from or mitigate the fact that the party
is in breach of the first representation, warranty, or covenant. Any reference
to any particular Code Section or any other statute, law or regulation
will be interpreted to include any revision of or successor to that Section regardless
of how it is numbered or classified. As used in this Agreement, the words “include”
and “including,” and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words “without
limitation.” Except as otherwise indicated, all references in this Agreement to
a “Section,” a “Schedule” and an “Exhibit” are intended to refer to a section,
a schedule or an exhibit to this Agreement, respectively.

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK]

 

35

 

The
parties to this Agreement have caused this Agreement to be executed and
delivered as of December       , 2007.

 

	
   

  	
  “SELLER”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SOL LOGIC, INC.,

  
	
   

  	
   a California corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name: Frank Mitchell

  
	
   

  	
  Title: President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “MITCHELL”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FRANK MITCHELL, a shareholder of the Seller

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name: Frank Mitchell

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “PURCHASER”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  IMAGEWARE SYSTEMS, INC.,

  
	
   

  	
   a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name: S. James Miller, Jr.

  
	
   

  	
  Title: Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  “SELLER REPRESENTATIVE”

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name: Wink Jones

  

 

 

 

EXHIBIT A

 

CERTAIN DEFINITIONS

 

For purposes of the
Agreement (including this Exhibit A):

 

“Agreement”
shall mean the Asset Purchase Agreement to which this Exhibit A is attached
(including the Disclosure Schedule), as it may be amended from time to time.

 

There shall be deemed to be
a “Breach” of a representation,
warranty, covenant, obligation or other provision if there is or has been (a) any
inaccuracy in or breach (including any inadvertent or innocent breach) of, or
any failure (including any inadvertent failure) to comply with or perform, such
representation, warranty, covenant, obligation or other provision, or (b) any
claim (by any Person) or other circumstance that is inconsistent with such
representation, warranty, covenant, obligation or other provision; and the term
“Breach” shall be deemed to refer to any such inaccuracy, breach, failure,
claim or circumstance.

 

“CERCLA”
shall mean the Comprehensive Environmental Response, Compensation and Liability
Act.

 

“COBRA” shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended.

 

 “Code” shall
mean the Internal Revenue Code of 1986, as amended.

 

“Consent”
shall mean any approval, consent, ratification, permission, waiver or
authorization (including any Governmental Authorization).

 

 “Contract”
shall mean any written, oral, implied or other agreement, contract,
understanding, arrangement, instrument, note, guaranty, indemnity,
representation, warranty, deed, assignment, power of attorney, certificate,
purchase order, work order, insurance policy, benefit plan, commitment,
covenant, assurance or undertaking of any nature.

 

 “Damages”
shall include any loss, damage, injury, decline in value, Liability, claim,
demand, settlement, judgment, award, fine, penalty, Tax, fee (including any
reasonable legal fee, expert fee, accounting fee or advisory fee), charge, cost
(including any cost of investigation) or expense of any nature.

 

 “Disclosure Schedule”
shall mean the schedule (dated as of the date of the Agreement) delivered to
the Purchaser on behalf of Seller, a copy of which is attached to the Agreement
and incorporated in the Agreement by reference.

 

“DOL” shall mean the United States Department of Labor.

 

“Encumbrance”
shall mean any lien, pledge, hypothecation, charge, mortgage, security
interest, encumbrance, equity, trust, equitable interest, claim, preference,
right of possession, lease, tenancy, license, encroachment, covenant,
infringement, interference, Order, proxy, option, right of first refusal,
preemptive right, community property interest, legend, defect, impediment,
exception, reservation, limitation, impairment, imperfection of title,
condition or restriction of any nature (including any restriction on the
transfer of any asset, any restriction on the receipt of any income derived
from any asset, any restriction on the use of any asset and any restriction on
the possession, exercise or transfer of any other attribute of ownership of any
asset).

 

1

 

“Entity”
shall mean any corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, cooperative, foundation, society, political party, union,
company (including any limited liability company or joint stock company), firm
or other enterprise, association, organization or entity.

 

“ERISA” shall mean the Employee Retirement Income
Security Act of 1974, as amended.

 

“FMLA” shall mean the Family Medical Leave Act of 1993,
as amended.

 

“Foreign Plan” shall  mean:
(i) any plan, program, policy, practice, Contract or other arrangement
mandated by a Governmental Body other than the United States; (ii) any
Seller Employee Plan maintained or contributed to by the Seller or any Seller
Affiliate that is not subject to United States law; and (iii) any Seller
Employee Plan that covers or has covered Seller Employees whose services are
performed primarily outside of the United States.

 

“GAAP”
shall mean U.S. generally accepted accounting principles.

 

“Governmental
Authorization” shall mean any: (a) permit, license,
certificate, franchise, concession, approval, consent, ratification,
permission, clearance, confirmation, endorsement, waiver, certification,
designation, rating, registration, qualification or authorization issued,
granted, given or otherwise made available by or under the authority of any
Governmental Body or pursuant to any Legal Requirement; or (b) right under
any Contract with any Governmental Body.

 

“Governmental
Body” shall mean any: (a) nation, principality, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign
or other government; (c) governmental or quasi-governmental authority of
any nature (including any governmental division, subdivision, department,
agency, bureau, branch, office, commission, council, board, instrumentality,
officer, official, representative, organization, unit, body or Entity and any
court or other tribunal); (d) multi-national organization or body; or (e) individual,
Entity or body exercising, or entitled to exercise, any executive, legislative,
judicial, administrative, regulatory, police, military or taxing authority or
power of any nature.

 

“Hazardous
Material” shall include: (a) any petroleum, waste oil,
crude oil, asbestos, urea formaldehyde or polychlorinated biphenyl; (b) any
waste, gas or other substance or material that is explosive or radioactive; (c) any
“hazardous substance,” “pollutant,” “contaminant,” “hazardous waste,” “regulated
substance,” “hazardous chemical” or “toxic chemical” as designated, listed or
defined (whether expressly or by reference) in any statute, regulation or other
Legal Requirement (including CERCLA and any other so-called “superfund” or “superlien”
law and the respective regulations promulgated thereunder); (d) any other
substance or material (regardless of physical form) or form of energy that is
subject to any Legal Requirement which regulates or establishes standards of
conduct in connection with, or which otherwise relates to, the protection of
human health, plant life, animal life, natural resources, property or the
enjoyment of life or property from the presence in the environment of any
solid, liquid, gas, odor, noise or form of energy; and (e) any compound,
mixture, solution, product or other substance or material that contains any
substance or material referred to in clause “(a)”, “(b)”, “(c)” or “(d)” above.

 

“HIPAA” shall mean the Health Insurance Portability and
Accountability Act of 1996, as amended.

 

2

 

“Immaterial
Contract” shall mean any Seller Contract that is currently in
effect that: (a) was entered into by the Seller in the Ordinary Course of
Business; (b) has a term of less than 90 days or may be terminated by the
Seller (without penalty) within 30 days after the delivery of a termination
notice by the Seller to the other party thereto; and (c) does not
contemplate or involve the payment of cash or other consideration after the
date hereof in an amount or having a value in excess of $5,000.

 

“Indebtedness” means, with respect to the Seller: (a) all
indebtedness of the Seller for borrowed money (including bank overdrafts)
whether or not contingent, including, without limitation, any amounts
outstanding or owing under capital leases, bonds, debentures or similar
instruments, letters of credit, notes or dividends payable; (b) all
obligations of the Seller in respect of banker’s acceptances or other similar
instruments (including reimbursement obligations with respect thereto); (c) all
obligations of the Seller to pay the deferred and unpaid purchase price of
property or services (other than trade payables incurred in the Ordinary Course
of Business); (d) the capitalized portion of all obligations of the Seller
as lessee under leases that have been or should be, in accordance with GAAP, be
recorded as capital leases; (e) all indebtedness (fixed or contingent) of
others under which the Seller acts as surety, guarantor or indemnitor, to the
extent such indebtedness is guaranteed by the Seller; (f) all obligations
secured by an Encumbrance on the property and assets of the Seller; (g) to
the extent not otherwise included in this definition, obligations under any
interest rate swap, cap or collar agreement or other hedging agreements and (h) all
interest, prepayment penalties, fees, expenses, charges, reimbursements,
indemnities and other payment obligations in respect of the Indebtedness set
forth in clauses (a) through (g) above.

 

“Indemnification
Determination Date”  shall mean the date that the final amount of the Damages are (i) agreed
to by the parties in writing, (ii) entered by a court of competent jurisdiction
pursuant to a final and non-appealable order or judgment, or (iii) rendered
by an arbitration or like panel to which the parties have agreed to submit such
matters pursuant to a final, non-appealable determination thereby.

 

“Intellectual
Property” shall mean algorithms, APIs, apparatus, circuit
designs and assemblies, gate arrays, IP cores, net lists, photomasks,
semiconductor devices, test vectors, databases, data collections, diagrams,
formulae, inventions (whether or not patentable), know-how, logos, marks
(including brand names, product names, logos, and slogans), methods, network
configurations and architectures, processes, proprietary information,
protocols, schematics, specifications, software, software code (in any form,
including source code and executable or object code), subroutines, techniques,
user interfaces, URLs, web sites, works of authorship and other forms of
technology (whether or not embodied in any tangible form and including all
tangible embodiments of the foregoing, such as instruction manuals, laboratory
notebooks, prototypes, samples, studies and summaries).

 

“Intellectual
Property Rights” shall mean all past, present, and future rights
of the following types, which may exist or be created under the laws of any
jurisdiction in the world: (A) rights associated with works of authorship,
including exclusive exploitation rights, copyrights, moral rights and mask
works; (B) trademark and trade name rights and similar rights; (C) trade
secret rights; (D) patent and industrial property rights; (E) other
proprietary rights in Intellectual Property; and (F) rights in or relating
to registrations, renewals, extensions, combinations, divisions, and reissues
of, and applications for, any of the rights referred to in clauses “(A)”
through “(E)” above.

 

“IRS” shall mean the United States Internal Revenue
Service.

 

“Knowledge” shall mean the following: (a) with
respect to Mitchell, such individual shall be deemed to have Knowledge of a
particular fact or other matter if (i) such individual is actually aware
of the fact or matter (after such inquiry as would be customary for a
transaction of the nature contemplated by this Agreement), or (ii) such
individual would reasonably be expected to have 

 

3

 

Knowledge
of the fact or matter (after such inquiry as would be customary for a
transaction of the nature contemplated by this Agreement) given such individual’s
employment position with the Seller; and (b) with respect to the Seller,
the Seller will be deemed to have Knowledge of a particular fact or other
matter if any individual who is currently serving as a director or executive
officer of the Seller has, or at any time had, Knowledge of that fact or other
matter (as determined in accordance with clause (a) above).

 

“Legal
Requirement” shall mean any federal, state, local, municipal,
foreign or other law, statute, legislation, constitution, principle of common
law, resolution, ordinance, code, edict, decree, proclamation, treaty,
convention, rule, regulation, ruling, directive, pronouncement, requirement,
specification, determination, decision, opinion or interpretation issued,
enacted, adopted, passed, approved, promulgated, made, implemented or otherwise
put into effect by or under the authority of any Governmental Body.

 

“Liability”
shall mean any debt, obligation, duty or liability of any nature (including any
unknown, undisclosed, unmatured, unaccrued, unasserted, contingent, indirect,
conditional, implied, vicarious, derivative, joint, several or secondary
liability), regardless of whether such debt, obligation, duty or liability
would be required to be disclosed on a balance sheet prepared in accordance
with generally accepted accounting principles and regardless of whether such
debt, obligation, duty or liability is immediately due and payable.

 

“Liability
Payoff Shares” shall mean that number of Shares received at the
Closing having an aggregate value equal to the lesser of $500,000 or the dollar
amount owed by Seller to its creditors at the time the Shares are sold (based
on the price per share at which the Shares are sold).

 

“Order”
shall mean any: (a) order, judgment, injunction, edict, decree, ruling,
pronouncement, determination, decision, opinion, verdict, sentence, subpoena,
writ or award issued, made, entered, rendered or otherwise put into effect by
or under the authority of any court, administrative agency or other
Governmental Body or any arbitrator or arbitration panel; or (b) Contract
with any Governmental Body entered into in connection with any Proceeding.

 

An action taken by or on
behalf of the Seller shall not be deemed to have been taken in the “Ordinary Course of Business”
unless:

 

(a)                                  such action is recurring in nature, is
consistent with the past practices of the Seller and is taken in the ordinary
course of the normal day-to-day operations of the Seller;

 

(b)                                 such action is taken in accordance with sound
and prudent business practices;

 

(c)                                  such action is not required to be authorized
by the shareholders of the Seller, the board of directors of the Seller or any
committee of the board of directors of the Seller and does not require any
other separate or special authorization of any nature; and

 

(d)                                 such action is similar in nature and
magnitude to actions customarily taken, without any separate or special
authorization, in the ordinary course of the normal day-to-day operations of
any Entity (other than the Seller) that is engaged in businesses similar to the
business of the Seller.

 

“PBGC” shall mean the United States Pension Benefit
Guaranty Corporation.

 

“Person”
shall mean any individual, Entity or Governmental Body.

 

4

 

“Proceeding”
shall mean any action, suit, litigation, arbitration, proceeding (including any
civil, criminal, administrative, investigative or appellate proceeding and any
informal proceeding), prosecution, contest, hearing, inquiry, inquest, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any Governmental Body or any arbitrator or
arbitration panel.

 

“Purchaser
Indemnitees” shall mean the following Persons: (a) the
Purchaser; (b) the Purchaser’s current and future affiliates; (c) the
respective Representatives of the Persons referred to in clauses “(a)” and “(b)”
above; and (d) the respective successors and assigns of the Persons
referred to in clauses “(a)”, “(b)” and “(c)” above.

 

“Registered
IP” shall mean all Intellectual Property Rights that are
registered, filed, or issued under the authority of, with or by any
Governmental Body, including all patents, registered copyrights, registered
mask works and registered trademarks and all applications for any of the
foregoing.

 

Each of the following shall
be deemed to be a “Related Party”: (a) each
individual who is an officer of the Seller; (b) each member of the family
of each of the individuals referred to in clause “(a)” above; and (c) any
Entity (other than the Seller) in which any one of the individuals referred to
in clauses “(a)” and “(b)” above holds or held (or in which more than one of
such individuals collectively hold or held), beneficially or otherwise, a
controlling interest or a material voting, proprietary or equity interest.

 

“Registration Rights
Agreement” shall
mean the registration rights agreement, by and between the Purchaser and the
Seller, in a form to be agreed upon thereby, covering the registration for
resale of certain of the Shares.

 

“Representatives”
shall mean officers, directors, employees, agents, attorneys, accountants,
advisors and representatives.

 

“Seller
Affiliate” shall mean any Person under common control with the
Seller within the meaning of Sections 414(b), (c), (m) and (o) of the
Code, and the regulations issued thereunder.

 

“Seller
Contract” shall mean any Contract that is currently in effect: (a) to
which the Seller is a party; (b) by which the Seller or any of its assets
is bound or under which the Seller has any obligation; (c) under which the
Seller has any right or interest; or (d) to which a Seller is a party, the
rights, interest or benefits of which are used by the Seller in the Business.

 

“Seller Employee” shall mean any current or former
employee, independent contractor or director of the Seller or any Seller
Affiliate.

 

“Seller Employee Agreement” shall mean each management,
employment, severance, consulting, relocation, repatriation or expatriation
agreement or other Contract between the Seller or any Seller Affiliate and any
Seller Employee, other than any such management, employment, severance,
consulting, relocation, repatriation or expatriation agreement or other
Contract with a Seller Employee which is terminable “at will” without any
obligation on the part of the Seller or any Seller Affiliate to make any
payments or provide any benefits in connection with such termination.

 

“Seller Employee Plan” shall mean any plan, program,
policy, practice, Contract or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or
remuneration of any kind, whether written, unwritten or otherwise, funded or
unfunded, including each 

 

5

 

“employee
benefit plan,” within the meaning of Section 3(3) of ERISA (whether
or not ERISA is applicable to such plan), that is or has been maintained,
contributed to, or required to be contributed to, by the Seller or any Seller
Affiliate for the benefit of any Seller Employee, or with respect to which the
Seller or any Seller Affiliate has or may have any liability or obligation,
except such definition shall not include any Seller Employee Agreement.

 

“Seller
IP” shall mean all Intellectual Property Rights and Intellectual
Property in which the Seller has (or purports to have) an ownership interest or
an exclusive license or similar exclusive right.

 

“Seller
IP Contract” shall mean any Contract to which the Seller is or
was a party or by which the Seller is or was bound, that contains any
assignment or license of, or any covenant not to assert or enforce, any
Intellectual Property Right or that otherwise relates to any Seller IP or any
Intellectual Property developed by, with or for the Seller.

 

“Seller Pension Plan” shall mean each Seller
Employee Plan that is an “employee pension benefit plan,” within the meaning of
Section 3(2) of ERISA.

 

“Seller
Software” shall mean any software (including firmware and other
software embedded in hardware devices) owned, developed (or currently being
developed), used, marketed, distributed, licensed or sold by the Seller at any
time (other than non-customized third-party software licensed to the Seller for
internal use on a non-exclusive basis).

 

“Standard
Form Agreements” shall mean the forms of agreements
attached as Appendices 2.14(A) and 2.14(B) to the Disclosure
Schedule.

 

“Tax”
shall mean any tax (including any income tax, franchise tax, capital gains tax,
estimated tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax,
business tax, occupation tax, inventory tax, occupancy tax, withholding tax or
payroll tax), levy, assessment, tariff, impost, imposition, toll, duty
(including any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), that is, has been or may in the
future be (a) imposed, assessed or collected by or under the authority of
any Governmental Body, or (b) payable pursuant to any tax-sharing
agreement or similar Contract.

 

“Tax Return”
shall mean any return (including any information return), report, statement,
declaration, estimate, schedule, notice, notification, form, election,
certificate or other document or information that is, has been or may in the
future be filed with or submitted to, or required to be filed with or submitted
to, any Governmental Body in connection with the determination, assessment,
collection or payment of any Tax or in connection with the administration,
implementation or enforcement of or compliance with any Legal Requirement
relating to any Tax.

 

“Transactional
Agreements” shall mean: (a) the Agreement; (b) the
Escrow Agreement; and (c) the Registration Rights Agreement.

 

“Transactions”
shall mean (a) the execution and delivery of the respective Transactional
Agreements, and (b) all of the transactions contemplated by the respective
Transactional Agreements, including: (i) the sale of the Assets by the
Seller to the Purchaser in accordance with the Agreement; (ii) the
assumption of the Assumed Liabilities by the Purchaser; and (iii) the
performance by the Seller, the Seller Representative and the Purchaser of their
respective obligations under the Transactional Agreements, and the exercise by
the Seller, the Seller Representative and the Purchaser of their respective
rights under the Transactional Agreements.

 

6

 

“Treasury Regulations” shall mean the final and temporary (but not
proposed) income tax regulations promulgated under the Code, as such
regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).

 

7Exhibit 10.2

 

Offer of Employment Letter Agreement

 

December 19,
2007

 

Mr. Frank
R. Mitchell

7409
Weaver Way

Prescott
Valley, AZ 86314

 

Dear
Frank:

 

ImageWare
Systems, Inc. (“ImageWare”) is pleased to offer you the position of Vice
President, Advanced Programs. We would like your start date to be Thursday, December 20,
2007.

 

You
will be expected to perform various duties consistent with your position, as
provided to you from time-to-time by your supervisor. ImageWare may change your
position, duties and work location from time to time, as it deems necessary.
You will report to me, Chairman and Chief Executive Officer, in the San Diego
office located at 10883 Thornmint Road, San Diego, CA 92127.

 

If
you accept this offer, your compensation will be $5,833.33 semi-monthly, less
standard payroll deductions and all required withholdings.

 

You
will be eligible for standard ImageWare benefits as in effect from time to
time. ImageWare provided benefits become effective the first day of the month
following sixty (60) days of employment. In your case, benefits will become
effective March 1, 2008. It is currently the policy of ImageWare to
provide health insurance premium coverage for the employee, plus one qualifying
dependent. Please feel free to contact me at 858-673-8600 x113 should you have
specific questions regarding benefits and/or ImageWare policies. Your Paid Time
Off (PTO) will accrue at a rate equal to 120 hours per year or 15 days.

 

As
an ImageWare employee, you will be expected to abide by ImageWare corporate
policies. As a condition of employment, you will be required to sign and comply
with the attached Employee Nondisclosure and Invention Assignment Agreement,
which among other things, prohibits unauthorized use or disclosure of the
proprietary information of ImageWare.

 

Please
understand that all employees at ImageWare are considered to be “at will
employees,” which means that no guarantee of employment is made or implied. You
may terminate your employment with ImageWare at any time and for any reason whatsoever
simply by notifying ImageWare. Likewise, ImageWare may terminate your
employment at any time and for any reason whatsoever, with or without cause or
advance notice. This at-will employment relationship cannot be changed except
in writing signed by an authorized ImageWare officer.

 

All
employees, with access to customer databases and information, are required to
submit to and pass a criminal background investigation. Should an employee,
whose essential functions and responsibilities require access to such databases
and information, fail to submit to and pass a criminal background investigation
that employee’s employment will immediately terminate.

 

 

	
  

  	
  

  10883 Thornmint Road
  San Diego, CA 92127 · p: 858.673.8600 F: 858.673.1700. · www.iwsinc.com

  

 

 

Frank
R. Mitchell

December 19,2007

 

This
letter, together with your Employee Nondisclosure and Invention Assignment
Agreement, forms complete and exclusive statement of the terms of your
employment with ImageWare. The employment terms in this letter supersede any
other agreements or promises made to you by anyone, whether oral or written.
This offer is subject to satisfactory proof of your right to work in the United
States as well as your fulfillment of all other necessary conditions required
by state or federal law.

 

Please
sign and date one copy of this letter, and return it to Sheryl Edwards
attention at 10883 Thornmint Road, San Diego, CA 92127 or via the Human
Resources confidential fax at 858-451-8338 within five (5) days of
receipt, to indicate your acceptance of this offer. Retain a second copy for
your records.

 

When
reporting to your first day of employment, please be prepared to provide
satisfactory evidence for eligibility of employment as required by federal law.
Failure to provide satisfactory evidence for eligibility of employment may
delay your employment status with ImageWare.

 

We
are looking forward to a mutually rewarding relationship and believe in your
ability to contribute to the future success of ImageWare. If you have any
questions about this offer, please do not hesitate to call.

 

	
  Sincerely,

  
	
   

  
	
   

  
	
  /s/
  Jim Miller

  	
   

  
	
  Jim
  Miller

  
	
  Chairman/Chief
  Executive Officer

  

 

Acknowledgment
and Acceptance:

 

I
hereby accept the terms of my employment with ImageWare Systems, Inc. as
set forth above and acknowledge that my employment with ImageWare Systems, Inc.
is at-will.

 

 

	
  /s/
  Frank R. Mitchell

  	
   

  	
  19
  December, 2007

  
	
  Frank
  R. Mitchell

  	
   

  	
  Date

  

 

End
: Employee Nondisclosure and Invention Assignment Agreement.

 

 

	
  

  	
  

  10883 Thornmint Road San Diego, CA 92127 · p:
  858.673.8600 F: 858.673.1700. · www.iwsinc.com

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