AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

U.S. DRY CLEANING CORPORATION,

CLEANERS CLUB, INC.,

CLEANERS CLUB ACQUISITION SUB, INC.,

AND

RIAZ CHAUTHANI

December 21, 2006

TABLE OF CONTENTS

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EXHIBITS

COMPANY DISCLOSURE SCHEDULES

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AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this " Agreement "), dated as of December 21, 2006, by and among U.S. Dry Cleaning Corporation, a Delaware corporation (" Parent "), Cleaners Club Acquisition Sub, Inc., a California corporation and a wholly owned subsidiary of Parent (" Merger Sub "), Cleaners Club, Inc., a California corporation (the " Company "), and, solely for the purposes of ARTICLE IX and ARTICLE X of this Agreement, Riaz Chauthani, the sole shareholder of the Company (" Sole Shareholder ").

RECITALS

WHEREAS, the Board of Directors of each of Parent, Merger Sub and the Company has adopted, and deems it advisable and in the best interests of its respective shareholders to consummate, the merger (the " Merger ") of the Company with and into Merger Sub, upon the terms and subject to the conditions set forth herein; and

WHEREAS, the Board of Directors of each of Parent, Merger Sub and the Company has unanimously adopted this Agreement and the transactions contemplated hereby, including the Merger, in accordance with the provisions of the General Corporation Law of the State of California (" California Law ") and upon the terms and subject to the conditions set forth herein; and

WHEREAS, the Board of Directors of the Company has unanimously determined that the consideration to be paid to the Sole Shareholder is fair to the Sole Shareholder and has resolved to recommend to the Sole Shareholder the approval of this Agreement and the Merger and the other transactions contemplated hereby upon the terms and subject to the conditions set forth herein; and

WHEREAS, concurrently with the execution of this Agreement, and as a condition and inducement to Parent’s willingness to enter into this Agreement, the Sole Shareholder has approved this Agreement, the Agreement of Merger, the Merger and the other transactions contemplated hereby in accordance with California Law; and

WHEREAS, the sole shareholder of Merger Sub has approved this Agreement, the Agreement of Merger and the Merger and the other transactions contemplated hereby in accordance with the provisions of California Law.

NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1    Defined Terms  

As used herein, the terms below shall have the following meanings. Any of such terms, unless the context otherwise requires, may be used in the singular or plural, depending upon the reference.

" 401(k) Plan " has the meaning set forth in Section 6.5 .

" Acquisition Transaction " means any transaction or series of related transactions involving: (i) the sale, license, disposition or acquisition of all or a material portion of the business or assets of the Company; (ii) the sale, issuance, grant, disposition or acquisition of (A) the Company Common Stock or other equity security of the Company, (B) any option, call, warrant or right (whether or not immediately exercisable) to acquire any Company Common Stock or other equity security of the Company, or (C) any security, instrument or obligation that is or may become convertible into or exchangeable for any Company Common Stock or other equity security of the Company; or (iii) any merger, consolidation, business combination, tender offer, share exchange, reorganization or similar transaction involving the Company; provided, however , the Merger and the other transactions contemplated by this Agreement will not be deemed an Acquisition Transaction in any case.

" Agreement " has the meaning set forth in the preamble.

" Agreement of Merger " has the meaning set forth in Section 2.3 .

" Annual Financial Statements " means the audited balance sheet of the Company at December 31, 2005 and December 31, 2006, together with the related statements of income, shareholders’ equity and cash flows, including the notes thereto.

" Audit " means any audit, assessment of Taxes, other examination by any Tax Authority, or any administrative or judicial proceeding or appeal of such proceeding relating to Taxes.

" Business Day " means any day that is not a Saturday, Sunday, or other day on which banks are required or authorized by Law to be closed in California.

" California Law " has the meaning set forth in the recitals.

" Closing " has the meaning set forth in Section 2.2 .

" Closing Balance Sheet " means the unaudited balance sheet of the Company as at the close of business on the day prior to the Closing Date, including the notes thereto.

" Closing Date " has the meaning set forth in Section 2.2 .

" Closing Statement " has the meaning set forth in Section 2.12(a) .

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" COBRA " has the meaning set forth in Section 3.17(d) .

" Code " means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

" Company " has the meaning set forth in the preamble.

" Company Articles " means the Articles of Incorporation of the Company as in effect on the date hereof.

" Company Authorization " has the meaning set forth in Section 3.10 .

" Company Board " has the meaning set forth in Section 2.6 .

" Company Bylaws " means the Bylaws of the Company as in effect on the date hereof.

" Company Certificate " means a certificate or certificates representing shares of Company Common Stock.

" Company   Common Stock " means all shares of common stock, par value $1.00 per share, of the Company.

" Company Debt " means all Indebtedness of the Company.

" Company Disclosure Schedule " has the meaning set forth in ARTICLE III .

" Company Employee Plans " has the meaning set forth in Section 3.16(a) .

" Company Financial Statements " means the Annual Financial Statements of the Company, the Interim Financial Statement and the Monthly Financial Statements.

" Company Intellectual Property " means the Intellectual Property used in or necessary for the conduct of the business of the Company as currently conducted and as currently proposed to be conducted.

" Company Owned Intellectual Property " means any Company Intellectual Property (including all of the intellectual property set forth in Section 3.13(b) of the Company Disclosure Schedule) which the Company represents herein to Parent is owned by the Company.

" Company Subsidiary " means any corporation, association, business entity, partnership, limited liability company or other entity of which the Company, either alone or together with one or more such entities, (i) directly or indirectly owns or controls securities or other interests representing more than fifty (50%) of the voting power of such entity, or (ii) is entitled, by contract or otherwise, to elect, appoint or designate directors constituting a majority of the members of such entity’s board of directors or other governing body.

" Confidential Information " has the meaning set forth in Section 3.13(f) .

" Damages " has the meaning set forth in Section 9.1(a) .

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" Dollars " or " $ " means the lawful currency of the United States of America.

" Effective Time " has the meaning set forth in Section 2.3 .

" Environmental Claim " has the meaning set forth in Section 3.14(f)(1).

" Environmental Laws " has the meaning set forth in Section 3.14(f)(2) .

" ERISA " has the meaning set forth in Section 3.16(a) .

" ERISA Affiliate " has the meaning set forth in Section 3.16(a).

" Exchange Ratio " has the meaning set forth in Section 2.7(a).

" Final Date " has the meaning set forth in Section 8.1(b) .

" Financial Statements " means the Annual Financial Statements, the Interim Financial Statements and the Monthly Financial Statements.

" GAAP " means the United States generally accepted accounting principles.

" Governmental Entity " means any arbitrator, court, agency, commission, tribunal, nation, government, any state or other political subdivision thereof and any entity exercising or entitled to exercise executive, legislative, judicial, regulatory, taxing or administrative power or authority of any nature whatsoever, in each case, whether foreign or domestic.

" Indebtedness " means (i) all indebtedness for borrowed money or for the deferred purchase price of property or services (other than current liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (ii) any other indebtedness that is evidenced by a note, bond, debenture or similar instrument, (iii) all obligations under financing leases, (iv) all obligations in respect of acceptances issued or created, (v) all liabilities secured by any Lien on any property and (vi) all guarantee obligations.

" Indemnitee " has the meaning set forth in Section 9.2(a) .

" Indemnitor " has the meaning set forth in Section 9.2(a) .

" Intellectual Property " means all patents, trademarks, trade names, service marks, Internet domain names, copyrights, and any applications therefor, trade secrets, know-how, technology, inventions (whether patentable or unpatentable and whether or not reduced to practice), algorithms, processes, computer software programs or applications (in source code and/or object code form), databases, schematics, designs and tangible or intangible proprietary information or material.

" Interim Balance Sheet " means the unaudited balance sheet of the Company as at September 30, 2006, including the notes thereto.

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" Interim Financial Statements " means the Interim Balance Sheet and the related statements of income, shareholders’ equity and cash flows of the Company for the nine (9) months ended September 30, 2006, including the notes thereto.

" IRS " means the Internal Revenue Service.

" Knowledge " means (i) with respect to any natural person, the actual knowledge of such person after due and diligent inquiry, or (ii) with respect to the Company, Parent or Merger Sub the actual knowledge of such party’s directors and officers or other management-level personnel having responsibility for the matters represented after due and diligent inquiry. Notwithstanding the foregoing, the Company shall not be deemed to have Knowledge of a particular fact if and only if, Brian Walker (a) actually knows of such fact or event, (b) fails to discose such fact or event on the Company Disclosure Schedule, if required, and (c) no other director, officer or other management level personnel having responsibility for the matters represented has actual knowledge of such fact or event after due and diligent inquiry.

" Law " or " Laws " has the meaning set forth in Section 3.21 .

" Lease Agreements " has the meaning set forth in Section 3.19 .

" Lien " means, with respect to any asset (including any security), any mortgage, lien, pledge, charge, security interest, encumbrance or restriction of any kind in respect of such asset; provided, however , that the term "Lien" shall not include (i) statutory liens for Taxes, which are not yet due and payable or are being contested in good faith by appropriate proceedings and disclosed in Section 3.16 of the Company Disclosure Schedule, (ii) statutory or common law liens to secure landlords, lessors or renters under leases or rental agreements confined to the premises rented, (iii) deposits or pledges made in connection with, or to secure payment of, workers’ compensation, unemployment insurance, old age pension or other social security programs mandated under applicable Laws, (iv) statutory or common law liens in favor of carriers, warehousemen, mechanics to secure claims for labor, materials or supplies incurred in the ordinary course of business and (x) not yet delinquent or (y) being contested in good faith and other like liens, and (v) restrictions on transfer of securities imposed by applicable state and federal securities laws.

" Material Adverse Effect " means, with respect to any entity or group of entities, any event, change or effect that (x) is, or is reasonably expected to be, materially adverse to the condition (financial or otherwise), properties, assets (including intangible assets), prospects, liabilities, business, operations or results of operations of such entity and its subsidiaries, taken as a whole; or (y) would prevent or materially alter or delay any of the transactions contemplated by this Agreement.

" Material Contracts " has the meaning set forth in Section 3.28 .

" Materials of Environmental Concern " has the meaning set forth in Section 3.14(f)(3 ).

" Merger " has the meaning set forth in the recitals.

" Merger Sub " has the meaning set forth in the preamble.

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" Merger Shares " has the meaning set forth in Section 2.7(a) .

" Monthly Financial Statements " means the unaudited balance sheets of the Company for each fiscal month completed prior to the Closing Date, beginning with the month ended September 30, 2006 and the related statements of income, shareholders’ equity and cash flows for the monthly periods then ended.

" Net Working Capital " means the (x) cash less (y) total current accounts payable based on Company’s existing terms, in each case, as of the close of business on the day before the Closing Date.

" Officer’s Certificate " has the meaning set forth in Section 9.2(a ).

" Parent " has the meaning set forth in the preamble.

" Parent   Common Stock " means all shares of common stock, par value $0.001 per share, of Parent.

" Purchaser Damages " has the meaning set forth in Section 9.1(a) .

" Representatives " means officers, directors, employees, attorneys, accountants, advisors, agents, distributors, licensees, shareholders, subsidiaries and lenders of a party.

" Secretary of State " has the meaning set forth in Section 2.3 .

" Seller Damages " has the meaning set forth in Section 9.1(b) .

" Sole Shareholder " has the meaning set forth in the preamble.

" Superior Offer " means an unsolicited, bona fide written offer made by a third party to acquire, directly or indirectly, pursuant to a tender offer, exchange offer, merger, consolidation or other business combination, all or substantially all of the assets of the Company or a majority of the total outstanding voting securities of the Company, on terms that the Company Board has in good faith concluded (after the receipt of advice of its outside legal counsel and its financial adviser), taking into account, among other things, all legal, financial, regulatory and other aspects of the offer and the person making the offer, including the likelihood of consummation, to be more favorable, from a financial point of view, to the Sole Shareholder than the terms of the Merger.

" Store EBITDA " means the Company’s EBITDA less the Company headquarters general and administrative expenses calculated in accordance with GAAP and consistent with industry standards.

" Surviving Corporation " has the meaning set forth in Section 2.1 .

" Tax " or " Taxes " means all United States federal, state, local and foreign taxes, and other assessments of a similar nature including, without limitation: (i) taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, profits, sales, use, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation or net worth; (ii) taxes or other charges in the nature of excise, withholding, ad valorem , stamp, transfer, value added or gains taxes; (iii) license, registration and documentation fees; and (iv) customs duties, tariffs and similar charges, in each case, whether imposed directly or through withholding, and including any interest, additions to tax, or penalties applicable thereto.

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" Tax Authority " means the IRS and any other national, regional, state, municipal, foreign or other governmental or regulatory authority or administrative body responsible for the administration of any Taxes.

" Tax Return " means all United States federal, state, local and foreign tax returns, declarations, statements, reports, schedules, forms and information returns or other documents and any amendments thereto required to be filed with a Tax Authority.

" Third Party Claim " has the meaning set forth in Section 9.3 .

" Transaction Expenses " has the meaning set forth in Section 8.3 .

" Treasury Regulations " has the meaning set forth in Section 3.17(b) .

" Voting Debt " has the meaning set forth in Section 3.3(b) .

" WARN Act " means the Worker Adjustment and Retraining Notification Act.

ARTICLE II

THE MERGER

Section 2.1    The Merger

At the Effective Time and subject to and upon the terms and conditions of this Agreement and the applicable provisions of California Law, the Company shall be merged with and into Merger Sub, the separate corporate existence of the Company shall cease and Merger Sub shall continue as the surviving corporation and a wholly owned subsidiary of Parent. Merger Sub, as the surviving corporation after the Merger, is hereinafter referred to as the " Surviving Corporation ."

Section 2.2    Closing

The closing of the Merger (the " Closing ") shall take place at 10:00 a.m. Pacific time, on a date to be specified by the parties, which shall be no later than three (3) Business Days after satisfaction or waiver of all of the conditions set forth in ARTICLE VII of this Agreement (other than conditions which can be satisfied only by the delivery of certificates or other documents at the Closing) (the " Closing Date ") at the offices of Greenberg Traurig, LLP, located at 650 Town Center Drive, Suite 1700, Costa Mesa, California, unless another time, date or place is agreed to by the parties hereto. Each of the parties hereto acknowledges that it is their intention that the Closing occur (subject to the terms and conditions of this Agreement) as soon as practicable following the satisfaction or waiver of the conditions set forth in ARTICLE VII .

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Section 2.3    Effective Time

Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, the parties hereto shall file the agreement of merger in the form attached hereto as Exhibit A (the " Agreement of Merger ") and the officers’ certificates of the Company and Merger Sub, in each case, in such forms as are required by California Law with the Secretary of State of the State of California (the " Secretary of State "), whereupon the Company shall be merged with and into Merger Sub, which shall survive the Merger, pursuant to the provisions of California Law. The parties hereto shall make all other filings, recordings or publications required by California Law in connection with the Merger. The Merger shall become effective upon the filing of the Agreement of Merger with the Secretary of State pursuant to California Law or at such later time as shall be agreed upon by the parties and specified in the Agreement of Merger (the " Effective Time ").

Section 2.4    Effect of the Merger

From and after the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of California Law.

Section 2.5    Articles of Incorporation; Bylaws

(a)    Immediately after the Effective Time, the articles of incorporation of the Surviving Corporation shall be the articles of incorporation of Merger Sub as in effect immediately prior to the Effective Time and as set forth in Exhibit B to this Agreement, and such articles of incorporation shall be the articles of incorporation of the Surviving Corporation until thereafter amended as provided by Law and such articles of incorporation.

(b)    Immediately after the Effective Time, the bylaws of the Surviving Corporation shall be the bylaws of Merger Sub as in effect immediately prior to the Effective Time and as set forth in Exhibit C to this Agreement, and such bylaws shall be the bylaws of the Surviving Corporation until thereafter amended as provided by Law and such bylaws.

Section 2.6    Directors; Officers

(a)    Immediately after the Effective Time, the directors of Merger Sub at the Effective Time shall be the directors of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. In furtherance thereof, the Company shall secure, effective at the Effective Time, resignations of all of its incumbent directors (the " Company Board "), and the Company shall take all actions available to the Company to cause the directors of Merger Sub to be so elected or appointed at the Effective Time.

(b)    Immediately after the Effective Time, the officers of Merger Sub at the Effective Time shall be the officers of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly appointed.

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Section 2.7    Effect on Capital Stock

(a)    Conversion of Stock . Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time, other than shares of Company Common Stock to be canceled pursuant to Section 2.7(c) , shall be converted into the right to receive 780 (the "Exchange Ratio") fully paid and nonassessable shares of Parent Common Stock (collectively, the " Merger Shares "); provided, that in no event shall the number of shares of Parent Common Stock issuable in accordance with this section exceed 780,000 shares.

(b)    Capital Stock of Merger Sub . As of the Effective Time, by virtue of the Merger and without any action on the part of any of the parties hereto or any holder of securities of Merger Sub, each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares of common stock shall evidence ownership of such shares of capital stock of the Surviving Corporation.

(c)    Cancellation of Company Common Stock Owned by Parent . As of the Effective Time, by virtue of the Merger and without any action on the part of any of the parties hereto, all shares of Company Common Stock that are owned by Parent or by any direct or indirect wholly owned subsidiary of Parent immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof.

Section 2.8    Exchange of Certificates

At the Closing, the Sole Shareholder shall surrender the Company Certificate(s) held by him, together with a duly completed and validly executed letter of transmittal in such form as Parent may reasonably request, and, as soon as practicable following the Closing, Parent shall deliver the Merger Shares to the Sole Shareholder, and the Company Certificate so surrendered shall forthwith be canceled.

Section 2.9    No Further Ownership Rights in Company Common Stock

At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of any shares of Company Common Stock on the records of the Company.

Section 2.10    Lost, Stolen or Destroyed Certificates

In the event that any Company Certificates shall have been lost, stolen or destroyed, Parent shall cause to be paid in exchange for such lost, stolen or destroyed Company Certificates, upon the making of an affidavit of that fact by the Sole Shareholder, such payment of Parent Common Stock as may be required pursuant to this ARTICLE II ; provided, however , that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the Sole Shareholder to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Surviving Corporation with respect to the Company Certificates alleged to have been lost, stolen or destroyed.

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Section 2.11    Taking of Necessary Action; Further Action

If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company, the officers and directors of Parent, the Company and the Surviving Corporation are fully authorized in the name of their respective corporations to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement.

Section 2.12    Adjustments

(a)    On the day prior to the Closing Date, the Company shall deliver to Parent a statement (the " Closing Statement ") in form and substance reasonably satisfactory to Parent setting forth the Net Working Capital, Store EBITDA, Company Revenues and Company Debt as of the Closing Date. No later than two (2) Business Days prior to Closing, the Company shall deliver to Parent a draft Closing Statement setting forth the Company’s best estimate of the Net Working Capital, Store EBITDA, Company Revenues and Company Debt as of the Closing Date.

(b)    In the event the Net Working Capital as set forth in the Closing Statement is less than One Dollar ($1.00), the Sole Shareholder shall pay to Parent an amount equal to the amount by which Net Working Capital Amount is less than One Dollar ($1.00).

(c)    In the event the Company Debt as set forth in the Closing Statement is greater than Eight-Hundred Thousand Dollars ($800,000), the Sole Shareholder shall pay to Parent an amount equal to the amount by which the Company Debt is greater than Eight-Hundred Thousand Dollars ($800,000).

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF COMPANY

Any reference to any event, change, condition or effect being "material" with respect to any entity or group of entities means any event, change, condition or effect which (i) is or would reasonably be expected to be material to the condition (financial or otherwise), properties, assets (including intangible assets), prospects, liabilities, business, operations or results of operations of such entity or group of entities, taken as a whole or (ii) would or would reasonably be expected to prevent or materially alter or delay any of the transactions contemplated by this Agreement.

Each statement contained in any certificate signed by an officer of the Company and delivered to Parent pursuant to Section 7.3(b) shall constitute a representation and warranty hereunder by the Company to Parent as to the matters covered thereby.

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Except as disclosed in that section of the document to be delivered by the Company to Parent after the execution and delivery of this Agreement (the " Company Disclosure Schedule ") corresponding to the Section of this Agreement to which the following representations or warranties pertain, the Company represents and warrants to Parent as of the Closing Date as follows:

Section 3.1    Organization, Standing and Power

The Company is a corporation duly organized, validly existing and in good standing under the Laws of the State of California. The Company has the requisite corporate power to own its properties and to carry on its business as now being conducted and as currently proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would or would reasonably be expected to have a Material Adverse Effect on the Company. The Company has delivered a true and correct copy of the Company Articles and Company Bylaws, each as amended to date and as currently in effect, to Parent. The Company is not in violation of any of the provisions of the Company Articles or Company Bylaws.

Section 3.2    Subsidiaries

The Company does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for any equity or similar interest in, any corporation, association, partnership, joint venture, limited liability company, business association or other entity.

Section 3.3    Capitalization; Title to the Shares

(a)    The authorized capital stock of the Company consists of (i) 1,000,000 shares of Common Stock. Since inception, the Company has never authorized the issuance of any preferred stock, option plan, warrants or other securities exercisable or convertible into capital stock of the Company. As of the date hereof, 1,000 shares of Company Common Stock are issued and outstanding and all outstanding shares of Company Common Stock are issued to the Sole Shareholder. All of the outstanding shares of Company Common Stock are duly authorized, validly issued, fully paid and non-assessable.

(b)    Except as set forth above, as of the date hereof and, as of the Closing (i) there are no shares of capital stock or any other securities of the Company authorized, issued or outstanding; (ii) there are no existing options, warrants, calls, preemptive rights, Indebtedness having general voting rights or debt convertible into securities having such rights (" Voting Debt ") or subscriptions or other rights, agreements, arrangements or commitments of any character (including any shareholder rights plan or similar plan commonly referred to as a "poison pill"), relating to the issued or unissued capital stock of the Company obligating the Company to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or securities convertible into or exchangeable for such shares or equity interests, or obligating the Company to make any payment linked to the value of the Company Common Stock or the sale price of the Company, or obligating the Company to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment; and (iii) there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire the Common Stock, or other capital stock of the Company or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any other entity.

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(c)    There are no voting trusts or other agreements or understandings to which the Company is a party with respect to the voting of the Company Common Stock.

Section 3.4    Authority

The Company has the requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligations of the Company enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by the effect, if any, of any applicable bankruptcy, reorganization, insolvency, moratorium or other Laws affecting the enforcement of creditors' rights generally or any general principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity. Neither the execution and delivery by the Company of this Agreement nor the consummation of the transactions contemplated hereby will conflict with, or result in any breach or violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Company Articles or the Company Bylaws, (ii) any contract, agreement, license or understanding to which the Company is a party or to which any of its properties or assets are bound or (iii) any Law applicable to the Company, or any of its properties or assets, except, in the case of clauses (ii) and (iii) above, any such conflicts, breaches, violations, defaults, rights or losses which could not, individually or in the aggregate, have a Material Adverse Effect on the Company. No notice to, filing with, and no permit, authorization, consent or approval of, any Governmental Entity, or any other person is necessary for the execution and delivery of this Agreement by the Company or, except for the filing and recordation of the Agreement of Merger in accordance with the requirements of California Law, the consummation of the transactions contemplated by this Agreement.

Section 3.5    Financial Statements

Attached hereto as Section 3.5 of the Company Disclosure Schedule are true and correct copies of the Financial Statements. The Financial Statements have been prepared in accordance with the Company’s past practice and fairly present in all material respects the financial position as at such dates and the results of operations and cash flows for such periods of the Company. As of the Closing, the Closing Balance Sheet has been prepared in accordance with the Company’s past practice and fairly presents in all material respects the financial position of the Company as at the day before the Closing Date.

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Section 3.6    Absence of Certain Changes

Except as and to the extent set forth in the Financial Statements, from the date of the Interim Balance Sheet to the date of this Agreement, the Company has conducted its business in the ordinary course consistent with past practice and has not:

(a)    suffered any Material Adverse Effect;

(b)    incurred any liabilities or obligations (absolute, accrued, contingent or otherwise), except for non-material items incurred in the ordinary course of business, consistent with past practice or Transaction Expenses, that have been paid by the Company, or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves;

(c)    paid, discharged or satisfied any claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business, consistent with past practice, of liabilities and obligations reflected or reserved against in the Interim Balance Sheet or incurred in the ordinary course of business, consistent with past practice;

(d)    initiated or settled any litigation;

(e)    permitted or allowed any of its properties or assets (real, personal or mixed, tangible or intangible) to be subjected to any Liens;

(f)    written down the value of any inventory or written off as uncollectible any notes or accounts receivable, except for immaterial write-downs and write-offs in the ordinary course of business, consistent with past practice;

(g)    cancelled any debts or waived any claims or rights of substantial value;

(h)    sold, transferred, or otherwise disposed of any of its properties or assets (real, personal or mixed, tangible or intangible), except in the ordinary course of business, consistent with past practice;

(i)    granted or acquired, agreed to grant to or acquire from any person or entity any licenses of Intellectual Property, abandoned, disposed of or permitted to lapse any rights to the use of any Intellectual Property, or disposed of or disclosed to any person other than representatives of Parent any trade secret, formula, process or know-how or other Intellectual Property not theretofore a matter of public knowledge;

(j)    increased in any manner (including acceleration or funding provisions) the compensation or benefits of any current or former director, officer, employee or consultant of the Company (including any such increase pursuant to any bonus, pension, profit sharing, incentive compensation or other plan, policy, program, agreement, arrangement or commitment) or increased in any manner (including acceleration or funding provisions) the compensation or benefits payable or to become payable to any current or former director, officer, employee or consultant of the Company, except, in the case of employees other than officers of the Company, for such increases in compensation or benefits made in the ordinary course of business, consistent with past practice;

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(k)    adopted, entered into or amended any bonus, pension, profit sharing, incentive compensation, employment, consulting, severance, termination, deferred compensation or other plan, program, policy, agreement, arrangement or commitment, other than as required pursuant to applicable Law, or made any change in any change in control, severance or termination plan, policy, practice, program, agreement or arrangement;

(l)    entered into or amended any Material Contract;

(m)    entered into any operating lease or operating license for property or assets;

(n)    made capital expenditures or commitments or acquired any property, plant and equipment that would be treated as a capital expenditure in accordance with GAAP consistently applied for a cost in excess of an aggregate amount of Ten Thousand Dollars ($10,000);

(o)    declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of capital stock or other securities of the Company;

(p)    made or changed an election in respect of Taxes, adopted or changed any accounting method in respect of Taxes, failed to file, on a timely basis, with the appropriate Tax Authorities, all Tax Returns required to be filed for taxable periods ending on or before the Closing Date and due on or prior to the Closing Date, which such Tax Returns shall be true in all material respects, correct and complete, or failed to pay or remit, on a timely basis, any Taxes required to be paid, amended any Tax Return, entered into any closing agreement, settled or consented to any claim or assessment in respect of Taxes, consented to any extension or waiver of the statutory period of limitations applicable to any claim or assessment in respect of Taxes, or other made any Tax payments outside of the ordinary course of business;

(q)    paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any of its employees, officers, directors or shareholders or any affiliate or associate of any of its employees, officers, directors or shareholders (except for directors' fees and compensation to officers at rates not inconsistent with the Company's past practice in connection with business related travel or other expenses incurred on behalf of the Company) and advances to employees; or

(r)    agreed, whether in writing or otherwise, to take any action described in this Section 3.6 .

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Section 3.7    Absence of Undisclosed Liabilities

Except (i) as disclosed on the Interim Balance Sheet, (ii) for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since the date of the Interim Balance Sheet, and (iii) Transaction Expenses that have been paid by the Company, the Company does not have any liabilities (whether contingent or absolute, direct or indirect, known or unknown to the Company or matured or unmatured or otherwise) that would be required by GAAP consistently applied to be reflected on a balance sheet of the Company (including the notes thereto). There are no off balance sheet arrangements to which the Company is a party or otherwise involving the Company. Except as set forth in Section 3.7 of the Company Disclosure Schedule, the Company does not have any Indebtedness.

Section 3.8    Litigation

There is no private or governmental action, suit, proceeding, inquiry, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the Knowledge of the Company, threatened against the Company, any of its properties or any of its officers or directors (in their capacities as such), or which questions or challenges the validity of this Agreement or any of the transactions contemplated hereby; and to the Knowledge of the Company, there is no valid basis for any such action, suit, proceeding, claim, arbitration or investigation. There is no judgment, decree or order against the Company, or any of its directors or officers (in their capacities as such), that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement. The Company does not have any litigation pending against any other party.

Section 3.9    Restrictions on Business Activities

There is no agreement, judgment, injunction, order or decree binding upon the Company which has or could reasonably be expected to have the effect of prohibiting or impairing any current business practice of the Company, any acquisition of property by the Company or the conduct of business by the Company as currently conducted or as currently proposed to be conducted.

Section 3.10    Governmental Authorization

The Company has obtained all federal, state, county, local or foreign governmental consents, licenses, permits, grants, or other authorizations of a Governmental Entity (i) pursuant to which the Company currently operates or holds (or currently proposes to operate or hold) any interest in any of its properties or (ii) that is required for the operation of the business of the Company or the holding of any such interest ((i) and (ii) are herein collectively called " Company Authorizations "). The Company has complied in all respects with all such Company Authorizations, and all Company Authorizations are in full force and effect.

Section 3.11    Takeover Statutes

The Company Board has taken all actions so that any restrictions in any "fair price," "control share acquisition" or other similar Law, will not apply to Parent or Merger Sub with respect to the Merger, including the execution, delivery or performance of this Agreement and the consummation of the Merger and the other transactions contemplated hereby.

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Section 3.12    Title to Property

The Company has good and marketable title to all of its properties, interests in properties and assets that it purports to own (tangible and intangible), including all the properties and assets reflected on the Interim Balance Sheet or acquired after the date of the Interim Balance Sheet (except for properties, interests in properties and assets having an aggregate book value not in excess of Ten Thousand Dollars ($10,000) sold or otherwise disposed of since the date of the Interim Balance Sheet in the ordinary course of business, consistent with past practice), free and clear of all Liens. The property and equipment of the Company that are used in the operations of business are in good operating condition and repair, subject to normal wear and tear, are adequate for the uses to which they are being put and have been maintained and serviced in accordance with prudent practice and in material compliance with all applicable Laws. For purposes of this Section 3.12 only, the terms "property" and "assets" do not include Intellectual Property.

Section 3.13    Intellectual Property

(a)    The Company owns or is licensed to use all Company Intellectual Property. The Company Owned Intellectual Property and the conduct of the business of the Company has not violated, infringed or misappropriated, do not violate, infringe or misappropriate, and, to the Knowledge of the Company, will not violate, infringe or misappropriate, in the ordinary course of business as currently conducted and as currently proposed to be conducted, any Intellectual Property of a third party, any right to privacy or publicity, or any applicable Laws regulating unfair competition or trade practices.

(b)    Section 3.13(b) of the Company Disclosure Schedule sets forth a complete and accurate listing of all patents and patent applications, all registered trademarks, service marks, and trade names and applications therefor, all registered Internet domain names and applications therefor, and all registered copyrights and copyright applications owned or purported to be owned by the Company, including the jurisdictions in which each such Intellectual Property right subsists, has been issued or registered or in which any application for such issuance and registration has been filed. All Company Owned Intellectual Property is solely owned by the Company free and clear of all Liens, and the Company is listed in the records of the appropriate United States, state or foreign agency as the sole owner of record for each issued patent, and each registered trademark, service mark, trade name, Internet domain name and copyright, and applications therefor, listed in Section 3.13(b) of the Company Disclosure Schedule. The Company has not received any written notice or claim challenging the Company's ownership of any of the Company Owned Intellectual Property or suggesting that any other person has any claim of legal beneficial ownership thereto. There are no extant forbearances to sue, consents, settlement agreements, judgments, orders or similar litigation-related, inter partes or adversarial-related, or government-imposed obligations to which the Company is a party or is otherwise bound, that (i) restrict the rights of the Company to use, transfer, license or enforce any of its Intellectual Property rights; (ii) restrict the conduct of the business of the Company in order to accommodate a third party's Intellectual Property rights; or (iii) grant any third party any right with respect to any Company Intellectual Property rights.

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(c)    All issued patents, registered trademarks, registered copyrights, registered trade names, registered service marks and registered Internet domain names set forth in Section 3.13(b) of the Company Disclosure Schedule are valid and enforceable, have not expired or been canceled or abandoned, and are not subject to any pending or, to the Company's Knowledge, threatened judicial or administrative proceeding involving the validity, enforceability or scope thereof. To the Knowledge of the Company, no person is infringing, misappropriating or otherwise violating any Company Owned Intellectual Property or Intellectual Property exclusively licensed to the Company. The Company has not: (i) received any written notice of any claim of infringement or misappropriation by the Company of any Intellectual Property right of any person; (ii) been sued in any suit, action or proceeding which involves a claim of infringement or misappropriation by the Company of any Intellectual Property right of any person; (iii) brought any action, suit or proceeding for infringement or misappropriation of Intellectual Property or breach of any license or agreement involving Intellectual Property against any person; (iv) delegated, assigned or otherwise transferred any right to bring a claim or suit against any person for infringement or misappropriation of Company Intellectual Property; or (v) entered into any agreement to indemnify any person against any charge of infringement or misappropriation of any Intellectual Property in response to an actual or suspected threat of infringement or misappropriation; and, with respect to (ii) and (iii) above, no such suit, action or proceeding has been threatened.

(d)    The Company is not a party to or bound by any agreement containing any covenant (i) limiting the right of the Company to engage or compete in any line of business or to compete with any person, (ii) granting to any person any exclusive rights or sublicensing rights, (iii) providing "most favored nations" clauses to any person, or (iv) which otherwise adversely affects or would reasonably be expected to adversely affect the right of the Company to sell, distribute or manufacture any Company products or Company Intellectual Property or to purchase or otherwise obtain any software, components, parts or subassemblies.

(e)    Section 3.13(f) of the Company Disclosure Schedule lists all computer software that is owned, licensed, leased or otherwise used in the business of the Company (" Company Software "), other than commercially available, off-the-shelf software with an acquisition cost of less than Five Hundred Dollars ($500), and identifies which is owned, licensed, leased or otherwise used, as the case may be.

(f)    The Company has taken reasonable measures consistent with industry practice to protect and preserve the confidentiality of all trade secrets owned, used, appropriated or disclosed by the Company and not otherwise protected by patents or copyright (" Confidential Information "). All use, disclosure or appropriation of Confidential Information owned by the Company by or to a third party has been pursuant to the terms of an agreement or other legal obligation between the Company, on the one hand, and such third party, on the other hand, pursuant to which the third party undertakes to protect and not disclose such Confidential Information. All use, disclosure or appropriation by the Company of Confidential Information not owned by the Company has been pursuant to the terms of a written agreement between the Company and the owner of such Confidential Information, or is otherwise lawful. Neither the Company or any person under the control of the Company has materially breached any confidentiality agreements that such person is subject to, and, to the Knowledge of the Company, no other party to any such confidentiality agreement is in material breach thereof.

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(g)    No current or former shareholder, member, partner, director, officer or employee of the Company or any of its predecessors in interest will, after the consummation of the Merger, own or retain any rights in, to, or under any of the Company Intellectual Property.

(h)    The Company has at all times complied in all material respects with all applicable legal requirements relating to privacy, data protection and the collection and use of personal information gathered or accessed in the course of the operations of the Company. The Company has at all times complied in all material respects with all rules, policies and procedures established by the Company from time to time with respect to the foregoing. No claims are pending and, to the Knowledge of the Company, no claims have been asserted or threatened against the Company or are likely to be asserted or threatened against the Company by any person or entity alleging a violation of such person's or entity's privacy, personal or confidentiality rights under any such Laws, policies or procedures. The consummation of the Merger will not breach or otherwise cause any violation of any such Laws, policies or procedures.

(i)    With respect to all personal information described in Section 3.13(h) , the Company has taken all steps reasonably necessary (including, without limitation, implementing and monitoring compliance with measures with respect to technical and physical security) to protect the information in a manner consistent with the Laws, policies or procedures referred to in Section 3.13(h) . There has been no unauthorized access to or other misuse of that information.

Section 3.14    Environmental Matters

(a)    The Company is in full compliance with all Environmental Laws, which compliance includes, but is not limited to, the possession by the Company of all permits and other governmental authorizations required under all Environmental Laws, and compliance with the terms and conditions thereof. The Company has not received any communication (written or oral), whether from a Governmental Entity, citizens group, employee or otherwise, that alleges that the Company is not in such full compliance, and there are no circumstances that may prevent or interfere with such full compliance in the future. All permits and other governmental authorizations currently held by the Company pursuant to all Environmental Laws are identified in Section 3.14 of the Company Disclosure Schedule.

(b)    There is no Environmental Claim pending or, to the Company's Knowledge, threatened against the Company or against any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law.

(c)    There are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that could form the basis of any Environmental Claim against the Company or against any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law, or otherwise result in any costs or liabilities under Environmental Law.

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(d)    Without in any way limiting the generality of the foregoing, (i) all on-site and off-site locations where the Company has stored, disposed or arranged for the disposal of Materials of Environmental Concern are identified in Section 3.14(d)(i) of the Company Disclosure Schedule, (ii) all underground storage tanks, and the capacity and contents of such tanks, located on any property owned, leased, operated or used by the Company are identified in Section 3.14(d)(ii) of the Company Disclosure Schedule, (iii) except as set forth in Section 3.14(d)(iii) of the Company Disclosure Schedule, there is no asbestos contained in or forming part of any building, building component, structure or office space owned by the Company or by any affiliate of the Company or Sole Shareholder, (iv) except as set forth in Section 3.14(d)(iv) of the Company Disclosure Schedule, to the Knowledge of the Company, there is no asbestos contained in or forming part of any building, building component, structure or office space leased, operated or used by the Company and (v) except as set forth in Section 3.14(d)(v) of the Company Disclosure Schedule, no polychlorinated biphenyls or polychlorinated biphenyl-containing items are used or stored at any property owned, leased, operated or used by the Company.

(e)    The Company has provided to Parent all written assessments, reports, data, results of investigations or Audits, and other information that is in the possession of or reasonably available to the Company regarding environmental matters pertaining to or the environmental condition of the business of the Company or the compliance (or noncompliance) by the Company with any Environmental Laws.

(f)    The Company is not required by virtue of the transactions set forth herein and contemplated hereby, or as a condition to the effectiveness of any transactions contemplated hereby, (i) to perform a site assessment for Materials of Environmental Concern, (ii) to remove or remediate Materials of Environmental Concern, (iii) to give notice to or receive approval from any Governmental Entity pursuant to any Environmental Law, or (iv) to record or deliver to any person or entity any disclosure document or statement pertaining to environmental matters.

For purposes of this Agreement:

(1)    "Environmental Claim" means any claim, action, cause of action, suit, proceeding, investigation, order, demand or notice (written or oral) by any person or entity alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (a) the presence, or release into the environment, of, or exposure to, any Material of Environmental Concern at any location, whether or not owned or operated by the Company or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law.

(2)    "Environmental Laws" means all federal, state, local and foreign laws, regulations, ordinances, requirements of governmental authorities, and common law in effect as of the date hereof, relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata, and natural resources), including, without limitation, Laws relating to (i) emissions, discharges, releases or threatened releases of, or exposure to, Materials of Environmental Concern, (ii) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern, (iii) recordkeeping, notification, disclosure and reporting requirements regarding Materials of Environmental Concern, and (iv) endangered or threatened species of fish, wildlife and plant and the management or use of natural resources.

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(3)    "Materials of Environmental Concern" means chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products, asbestos or asbestos-containing materials or products, polychlorinated biphenyls, lead or lead-based paints or materials, radon, fungus, mold, mycotoxins or other substances that may have an adverse effect on human health or the environment.

Section 3.15    Taxes

(a)    The Company has filed all Tax Returns required to be filed by it, and all such Tax Returns were true, complete and correct in all material respects. All Taxes required to be paid by the Company have been timely paid other than those (i) currently payable without penalty or interest, or (ii) being contested in good faith by appropriate proceedings and for which, in the case of both clauses (i) and (ii), adequate reserves have been established on the books and records of the Company in accordance with the Company’s past practice. The Company does not have any liability for unpaid Taxes accruing after the date of the Interim Balance Sheets other than unpaid Taxes arising in the ordinary course of business.

(b)    There are no Liens for Taxes upon any property or assets of the Company.

(c)    The Company has not made any change in accounting methods, received a ruling from any taxing authority or signed an agreement with respect thereto or signed any closing agreement with respect to any Tax year.

(d)    The Company has complied in all respects with all applicable Laws, rules and regulations relating to the payment and withholding of Taxes (including withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar provisions under any foreign Laws) and has, within the time and the manner prescribed by Law, withheld and paid over to the proper taxing authorities all amounts required to be so withheld and paid over under applicable Laws.

(e)    The Company is not required to include in income any adjustment pursuant to Section 481(a) of the Code by reason of any voluntary change in accounting method (nor has any Governmental Entity proposed in writing any such adjustment or change of accounting method).

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(f)    No Audits are presently pending with regard to any Taxes or Tax Returns of the Company and a list of all Audits commenced or completed with respect to the Company with respect to taxable periods ending after January 1, 1999 is set forth in Section 3.15(f) of the Company Disclosure Schedule. No written notification has been received by the Company that such an Audit is pending or threatened with respect to any Taxes due from or with respect to or attributable to the Company or any Tax Return filed by or with respect to the Company.

(g)    All Tax deficiencies that have been claimed, proposed or asserted against the Company have been fully paid or finally settled, and no issue has been raised in any examination by any taxing authority that, by application of similar principles, could reasonably be expected to result in the proposal or assertion of a Tax deficiency for another year not so examined.

(h)    There are no outstanding requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any Taxes or deficiencies against the Company.

(i)    No power of attorney has been granted by or with respect to the Company with respect to any matter relating to Taxes.

(j)    The Company is not a party to, is not bound by or has any obligation under any Tax sharing agreement, Tax indemnification, or Tax allocation agreement or similar agreement, contract or arrangement, and the Company does not have any potential liability or obligation to any person as a result of, or pursuant to, any such agreement, contract or arrangement.

(k)    The Company is not a party to any agreement, plan, contract or arrangement (whether oral or in writing) that could result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code.

(l)    The deductibility of compensation paid by the Company will not be limited by Section 162(m) of the Code.

(m)    All transactions that could give rise to an understatement of the federal income tax liability of the Company within the meaning of Section 6662(d) of the Code are adequately disclosed on Tax Returns in accordance with Section 6662(d)(2)(B) of the Code if there is or was no substantial authority for the treatment giving rise to such understatement.

(n)    The Company is not and has not been a U.S. real property holding company (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

(o)    There are no unresolved questions or claims concerning Tax liability of the Company.

(p)    Other than any Tax Returns that have not yet been required to be filed, the Company has made available to Parent true, correct and complete copies of the United States federal income Tax Return and any state, local or foreign Tax Return for the Company for any jurisdiction for each of the taxable periods ended December 31, 2001 through December 31, 2005.

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(q)    The net operating loss and credit carryovers, if any, available to the Company, and their expiration dates, is set forth in the Disclosure Schedule. As of the date of this Agreement, none of such net operating loss and credit carryovers are subject to the limitations imposed by Sections 382, 383 or 384 of the Code (or any predecessor thereto) or otherwise.

(r)    Section 3.15(r) of the Disclosure Schedule sets forth (i) all elections with respect to Taxes made by the Company and (ii) all foreign, state and local jurisdictions in which the Company is or has been subject to Tax and each type of Tax payable in such jurisdiction during the taxable year ending December 31, 2005.

(s)    The Company has delivered or made available to Parent complete and accurate copies of each of (i) all Audit reports, letter rulings, technical advice memoranda and similar documents issued by a Governmental Entity relating to the United States or foreign Taxes due