AGREEMENT AND PLAN OF REORGANIZATION

Agreement and Plan of Merger

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FOCUS ENHANCEMENTS INC | VISUAL CIRCUITS CORPORATION

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Title: AGREEMENT AND PLAN OF REORGANIZATION
Governing Law: Minnesota Date: 1/30/2004
Industry: Software and Programming Law Firm: Manatt, Phelps & Phillips, LLP; Briggs and Morgan, P.A. Sector: Technology

Exhibit 2.1

AGREEMENT AND PLAN OF REORGANIZATION

This AGREEMENT AND PLAN OF REORGANIZATION (the or this "Agreement") is

made and entered into as of January 27, 2004 by and between FOCUS ENHANCEMENTS,

INC., a Delaware corporation ("Buyer"), and VISUAL CIRCUITS CORPORATION, a

Minnesota corporation ("Seller" or the "Company"). Buyer and Seller are the only

Parties to this Agreement and are collectively referred to herein as the

"Parties," each a "Party."

RECITALS

A. Seller's Board of Directors has adopted a plan of liquidation and

dissolution (the "Seller's Plan of Liquidation and Dissolution"), which

contemplates the wind-up of Seller's business affairs, liquidation or other

disposition of its assets, satisfaction or other disposition of its liabilities,

dissolution of Seller as a business entity and, upon such dissolution, transfer

of Seller's remaining assets to a liquidating trust for the benefit of its

stockholders.

B. Buyer desires to purchase from Seller and Seller desires to sell to

Buyer, in a transaction qualifying as a Tax-free sale of assets-for-stock

reorganization of Seller under Internal Revenue Code (the "Code") Section

368(a)(1)(C), substantially all of Seller's assets relating to, required for,

used in or otherwise constituting Seller's Business (as defined below) in

exchange for the assumption of certain liabilities relating to the Business and

the issuance of shares of Buyer's Common Stock as provided for herein.

C. The respective Boards of Directors of each of Buyer and Seller have

determined that this Agreement and the transactions contemplated hereby are in

furtherance of and consistent with their respective business strategies and in

the best interests of their respective stockholders.

D. Concurrently with the execution and delivery by the Parties of this

Agreement, as a material inducement to each of Buyer and Seller to enter into

this Agreement, each of David H. Parish, Daniel E. Sullivan and Robert J.

McPherson (each, a "Key Employee" and collectively, the "Key Employees") has

executed and delivered to Buyer separate employment agreements attached to this

Agreement respectively as Exhibit A-1, Exhibit A-2 and Exhibit A-3 hereto (the

"Employment Agreements"), the effectiveness of which agreements is subject only

to the Closing (as defined in Section 2.3 below).

E. Concurrently with the execution and delivery by the Parties of this

Agreement, as a material inducement to each of Buyer and Seller to enter into

this Agreement, each of the Key Employees has executed and delivered to Buyer

separate non-competition agreements attached to this Agreement respectively as

Exhibit B-1, Exhibit B-2 and Exhibit B-3 hereto (the "Non-Competition

Agreements"), the effectiveness of which agreements is subject only to the

Closing.

F. Concurrently with the execution and delivery by the Parties of this

Agreement, as a material inducement to each of Buyer and Seller to enter into

this Agreement, each of the Key Employees has executed and delivered to Buyer

separate confidential information and invention assignment agreements attached

to this Agreement respectively as Exhibit C-1, Exhibit C-2

<PAGE>

and Exhibit C-3 hereto (the "Executive Confidentiality/Invention Agreements"),

the effectiveness of which agreements is subject only to the Closing.

G. Concurrently with the execution and delivery by the Parties of this

Agreement, as a material inducement to Buyer to enter into this Agreement, each

of the Subject Company Shareholders (as defined below) has executed and

delivered to Buyer a Voting and Proxy Agreement (the "Voting and Proxy

Agreement(s)") with Buyer and Seller attached to this Agreement as Exhibits D-1,

D-2, D-3, D-4 and D-5, which become effective on the date hereof.

H. Concurrently with the execution and delivery of this Agreement, as a

material inducement to Buyer and Seller to enter into this Agreement, each of

the Technical Transferred Employees (as defined below) has executed and

delivered to Buyer, and Buyer has executed and delivered to each of the

Technical Transferred Employees, an offer of employment letter (the "Technical

Employee Offer Letter(s)") attached to this Agreement as Exhibits E-1, E-2, E-3

and E-4.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing Recitals, each of

which is incorporated in this Agreement as an essential term hereof, and the

covenants, promises and representations set forth herein, and for other good and

valuable consideration, the receipt and sufficiency of which are hereby

acknowledged, the Parties agree as follows:

ARTICLE 1

PURCHASE OF ASSETS AND ASSUMPTION OF CERTAIN LIABILITIES

1.1 Purchase and Sale of Assets. Subject to the terms and conditions of

this Agreement and except for the Excluded Assets as defined in Section 1.2,

Seller agrees to transfer, convey, assign and deliver to Buyer on the Closing

Date (as defined in Section 2.3 below), and Buyer agrees to buy from Seller,

free and clear of all encumbrances, all of Seller's right, title and interest in

and to all of the following assets wherever situated as of the Closing Date

(collectively, the "Acquired Assets") relating to Seller's digital media

technology and networking business (the "Business"):

1.1.1 all versions of Seller's hardware, software and service

products for the Business, which are listed by each such category on

Schedule 1.1.1 hereto, including all copies of the object code and all

copies of all source code for each version of said software and service

products, in source code and object code form, from which such software

and service products are derived (collectively, the "Products"), and

all of Seller's right, title and interest in and to any engineering,

product, test and manufacturing documentation or material used in the

Business, and any and all know-how, show-how, netlists, schematics,

bills of materials, design documentation, or other proprietary Seller

or Third Party documentation or software that is related to or used in

or proposed to be used in the Business or in connection with the

Products (collectively, the "Technology");

1.1.2 all of Seller's right, title and interest in and to (i)

the copyrights in all versions of the Products, in and to all of the

Technology, and in and to the items described in Section 1.1.7 below,

whether or not those copyrights are registered, with

<PAGE>

those that are registered listed on Schedule 1.1.2 hereto

(collectively, the "Transferred Copyrights" and individually, a

"Transferred Copyright"), (ii) any and all patents related to the

Products, the Business or the Technology, including applications in

progress, applications, provisional patents, continuations,

continuations in part, extensions and counterparts, all of which are

listed and described on Schedule 1.1.2 hereto (the "Transferred

Patents"), (iii) the trademarks used in the Business as described on

Schedule 1.1.2 hereto, together with all electronic copies and other

master copies of the foregoing (the "Transferred Trademarks"), together

with the goodwill associated with those trademarks, and (iv) any and

all rights in semiconductor mask-works, trade secrets, and any other

intangible rights in and to the Business, the Products or the

Technology, including rights to use specific URLs, all of which URLs

are listed and described on Schedule 1.1.2 hereto (the "Transferred

Domain Names").

The Products, the Technology, the Transferred Copyrights, the

Transferred Patents, the Transferred Trademarks and the Transferred

Domain Names, are referred to collectively herein as the "Transferred

Intellectual Property;"

1.1.3 all of Seller's past, present and future claims against

any Person relating to items included in the Acquired Assets,

including, without limitation, all causes in action and unliquidated

rights under manufacturers' and vendors' warranties or guarantees, but

only to the extent such claims do not relate to any liabilities

retained by Seller and not assumed by Buyer;

1.1.4 the current assets set forth and as described in

Schedule 1.1.4 (the "Acquired Current Assets"), all of which shall be

estimated as of the Closing Date pursuant to the preparation and

delivery of the Statement of Estimated Closing Net Working Capital (as

defined in Section 2.2.1 below);

1.1.5 all governmental permits, licenses or approvals owned or

held by Seller associated with the ownership, use or operation of the

Acquired Assets;

1.1.6 all contracts, licenses, instruments or other agreements

or rights to use the technology of Third Parties held by Seller

relating to the Business as described on Schedule 1.1.6, and all other

items used by Seller in connection with the development, manufacture,

testing, marketing or sale of the Acquired Assets or relating to the

Business, all of which are listed and described in Schedule 1.1.6 and,

to the extent transferable, all warranty rights and claims against

Third Parties relating to or arising under the Business (together with

those contracts, licenses and agreements, which are listed and

described in Schedule 1.1.9, the "Assigned Contracts");

1.1.7 all drawings, creative materials, advertising and

promotional materials, marketing materials, studies, reports, equipment

repair, maintenance or service records relating to the Business,

whether written or electronically stored or otherwise recorded;

1.1.8 all the tangible property, equipment, and fixed assets

of Seller, all of which are listed and described on Schedule 1.1.8,

including all personal property, equipment, computers and inventory

used in the Business;

<PAGE>

1.1.9 any and all maintenance, product, service, distribution

and/or other agreements to provide Products and/or services to Third

Parties who are Seller customers, and any other similar agreements, all

of which are listed and described in Schedule 1.1.9 (together with

those contracts, licenses and agreements described in Section 1.1.6

above, also the "Assigned Contracts");

1.1.10 Seller's insurance policies and prepaid premiums

(including all rights and interests therein and the proceeds thereof)

on the lives of the Key Employees, Transferred Technical Employees and

of any Transferred Employees, all of which are listed and described on

Schedule 1.1.10 (the "Transferred Insurance Policies"); and

1.1.11 the right to use and register with any Governmental

Body the name(s) "Visual Circuits," "Visual Circuits Corporation" or

any variation of "Visual Circuits."

1.2 Assets and Properties Not to be Transferred. On and after the

Closing, Seller shall retain and Buyer shall not acquire the following assets

and properties (the "Excluded Assets"):

1.2.1 Seller's corporate franchise;

1.2.2 Seller's rights arising from, in connection with or

incident to the transactions contemplated by this Agreement, including

the Collateral Agreements, the Non-Disclosure Agreement Amendment and

the Amended Non-Disclosure Agreement;

1.2.3 Seller's title and ownership of its bank accounts and

brokerage accounts;

1.2.4 the current assets set forth and as described in

Schedule 1.2.4, all of which shall be estimated as of the Closing Date

pursuant to the preparation and delivery of the Statement of Estimated

Closing Net Working Capital (the "Excluded Current Assets");

1.2.5 those Seller's insurance policies (including all rights

and interests therein and proceeds thereof), that are not Transferred

Insurance Policies;

1.2.6 pension, profit sharing or savings plans and trusts and

the assets thereof and any other benefit plan of Seller;

1.2.7 Seller's rights, title and interest under the

outstanding contracts, agreements, licenses, leases and similar

documents or instruments with Third Parties that are not Assigned

Contracts, including leasehold improvements under the Minnesota

Facility lease;

1.2.8 all Tax attributes or credits (including net operating

losses) arising from Seller's operation of the Business prior to the

Closing Date which do not transfer to Buyer by operation of law,

claims, causes of action, interests, rights of rebate and refunds

(including Tax refunds) to the extent that each of the foregoing relate

to any taxable period (or portion thereof) ending on or before the

Closing Date (the "Pre-Closing Tax

<PAGE>

Period") relating to or arising out of the foregoing Excluded Assets or

arising out of the liabilities to be retained by Seller pursuant to

Section 1.3 below;

1.2.9 the following books and records of the Business:

1.2.9.1 copies of: all business records of the

Business (including employment records of Key Employees,

Technical Transferred Employees and Transferred Employees) and

the software embodiments thereof on electronic or magnetic

form and all software applications to maintain such business

records of the Business; and

1.2.9.2 originals of: Tax Returns, financial

statements, employee benefit plans and associated statements

and records, stockholder records, records and plans relating

to warrants and stock options, banking records and other

records evidencing financial borrowing or investment

transactions prior to the Closing, personnel records of all

current and former Seller Employees that are not Key

Employees, Technical Transferred Employees or Transferred

Employees, Seller's corporate record book, Seller's insurance

policies, all contracts, agreements, licenses, leases

(including the lease on the Minnesota Facility) and similar

documents and instruments that are not Assigned Contracts, and

any records, documents or other instruments arising from, in

connection with or incident to an Excluded Asset or an

Excluded Liability.

1.2.10 any and all rights, claims or actions of Seller against

any officer, director, Employee or agent of Seller; and

1.2.11 the computer hardware and software presently used by

Seller's chief financial officer set forth on Schedule 1.2.11.

1.3 Limited Assumption of Seller Liabilities; Excluded Liabilities.

1.3.1 At and upon the Closing, Buyer shall assume and perform

(i) the current liabilities set forth and described in Schedule 1.3.1,

all of which shall be estimated as of the Closing Date pursuant to the

preparation and delivery of the Statement of Estimated Net Working

Capital (the "Assumed Current Liabilities") and obligations of Seller

related to the ongoing operations of the Business (the "Current

Liabilities") including all warranty work, and (ii) the obligations of

Seller under and pursuant to the Assigned Contracts (collectively, the

Assumed Current Liabilities and the obligations under and pursuant to

the Assigned Contracts are referred to herein as "Assumed

Liabilities"). The Assumed Liabilities shall not include any of

Seller's lease obligations with respect to Seller's currently leased

facilities in Minnesota (the "Minnesota Facility").

1.3.2 Buyer shall not assume nor perform any other liabilities

or obligations of Seller, except as specifically set forth herein.

Except as specifically set forth herein, Buyer shall and does not

assume, agree to perform, discharge or indemnify Seller against or

otherwise have any liability or obligation which is or was directly or

indirectly associated with or related to the Business and/or the

Acquired Assets prior to the Closing

<PAGE>

Date, including, without limitation, the current liabilities set forth

and described in Schedule 1.3.2 (the "Excluded Current Liabilities"),

any Taxes, whenever arising, of Seller or any of its affiliates for any

period, or relating or attributable to the Acquired Assets or the

operation of the Business during the Pre-Closing Tax Period ("Seller's

Taxes"), or any Benefits Liabilities (collectively, all of which are

referred to as the "Excluded Liabilities").

1.4 Instruments of Transfer. The sale, assignment, transfer, conveyance

and delivery of the Acquired Assets shall be made by such bills of sale, patent

and trademark assignment documentation and other recordable instruments of

assignment, transfer and conveyance as Buyer shall reasonably request.

1.5 Sales and Other Taxes. Seller shall be responsible for, and shall

pay or cause to be paid, any and all sales, use, documentary, recording and

similar transfer Taxes attributable to the purchase of the Acquired Assets

contemplated by this Agreement. Buyer shall cooperate with Seller to the extent

reasonably requested to minimize such Taxes. Seller shall be responsible for,

and shall pay or cause to be paid, all of Seller's Taxes, including, without

limitation, the portion of any real or personal property Taxes or other similar

Taxes allocated to the Pre-Closing Tax Period on a per diem basis.

ARTICLE 2

PURCHASE PRICE AND THE CLOSING

2.1 Price Amount and Share Consideration. As consideration for the

Acquired Assets, on the Closing Date Buyer shall issue to Seller and the Escrow

Agent (i) registered and freely tradable shares of Buyer's Common Stock valued

in the aggregate at Eight Million Five Hundred Thousand Dollars ($8,500,000)

(the "Calculated Share Consideration"), subject to the upward adjustment at the

Closing described in Section 2.2.2 below (the "Price Amount"), and (ii) One

Hundred Fifty Thousand (150,000) registered and freely tradable shares of

Buyer's Common Stock (the "Stated Share Consideration") with each of the

Calculated Share Consideration and the Stated Share Consideration subject to (A)

the Estimated Closing Net Working Capital Adjustment described in Section 2.2.1

below, and (B) the Final Closing Net Working Capital Adjustment set forth in

Section 2.2 below (collectively, the Calculated Share Consideration and the

Stated Share Consideration shall be referred to herein as the "Share

Consideration").

2.1.1 The exact number of shares of Buyer's Common Stock to be

issued by Buyer for the Calculated Share Consideration shall be

computed on or before the Closing Date by dividing the Price Amount,

less the Estimated Closing Net Working Capital Adjustment, by the

Calculated Share Consideration Price (defined in and computed pursuant

to Section 2.1.2); provided, however, that in no event shall the

Calculated Share Consideration, regardless of the foregoing

computation, be less than two million seven hundred fifty thousand

(2,750,000) shares or more than four million five hundred thousand

(4,500,000) shares.

<PAGE>

2.1.2 The Price Amount shall be computed by determination of

the average of the closing Nasdaq Small Cap Market selling price of

Buyer's Common Stock for a period of the twenty (20) trading days

preceding and ten (10) trading days following, the later of the date of

(i) this Agreement, or (ii) Buyer's public announcement of the

execution of this Agreement by both Parties (which shall not be later

than two (2) business days after the date of this Agreement) (the

"Share Consideration Price").

2.1.3 On the Closing Date, Buyer shall issue the Share

Consideration to Seller as follows:

2.1.3.1 ninety percent (90%) of the shares of Buyer's

Common Stock constituting the Share Consideration computed in

accordance with Section 2.1.1 shall be issued to Seller and/or

Seller's designee shareholders as provided in Seller's written

instructions to Buyer at least ten (10) days prior to the

Closing Date (the "Closing Shares"); and

2.1.3.2 ten percent (10%) of the shares of Buyer's

Common Stock constituting the Share Consideration (the "Escrow

Shares"), subject to any increase in Escrow Shares pursuant to

Section 2.2.3.3 below, shall be placed in escrow (the

"Escrow") with US Bank National Association as Third Party

escrow agent (the "Escrow Agent") for a period of twelve (12)

months from and after the Closing Date (subject to the

extension provisions for claims made by Buyer pursuant to the

Escrow Agreement, as defined below) (the "Escrow Period"),

pursuant to the escrow agreement in the form set forth as

Exhibit F to this Agreement (the "Escrow Agreement")

indemnifying Buyer in accordance with Article 9 hereof.

2.2 Net Working Capital and Cash Adjustments.

2.2.1 Estimated Closing Net Working Capital Adjustment. Not

less than three (3) days prior to the Closing Date, Seller shall

deliver to Buyer a statement of the Estimated Closing Net Working

Capital (the "Statement of Estimated Closing Net Working Capital")

determined on a basis consistent with the methodology to be employed in

the calculation of the Closing Net Working Capital pursuant to Section

2.2.3 below in the form set forth as, and in accordance with the

directives set forth in, Schedule 2.2.1 (such estimate, the "Estimated

Closing Net Working Capital"). In furtherance of the foregoing, Seller

shall also concurrently deliver to Buyer a detailed schedule of

Seller's Reorganization Expenses (segregated by professional services

and the amount paid to each of the professional advisors), certified to

be accurate by an officer of Seller, the total of which shall equal the

amount in the account "Prepaid Expense - Seller's Reorganization

Expense" as set forth in the Statement of Estimated Closing Net Working

Capital. To the extent that the Estimated Closing Net Working Capital

is less than Seven Hundred Fifty Thousand Dollars ($750,000) (the

"Target Closing Net Working Capital"), the Price Amount will be

decreased by such shortfall. Subsequent to Closing, the provisions of

Section 2.2.3 will apply (the "Estimated Closing Net Working Capital

Adjustment").

<PAGE>

2.2.2 Estimated Closing Cash Adjustment. Not less than three

(3) days prior to the Closing Date, Seller shall deliver to Buyer a

statement of Estimated Closing Cash (the "Statement of Estimated

Closing Cash") which shall show all cash of the Company estimated as of

the end of business on the Closing Date (the "Estimated Closing Cash").

To the extent that the Estimated Closing Cash (or Final Closing Cash,

as defined in Section 2.2.3.3 below, taking into account any prior

adjustment taken pursuant to the calculation of Estimated Closing Cash

at the Closing) is equal to or less than Two Hundred Twenty Thousand

Dollars ($220,000), Seller shall be entitled to retain such amount, and

the Price Amount shall be increased up to $30,000, by the amount of the

difference between $220,000 and the lesser of Estimated Closing Cash or

Final Closing Cash. Subsequent to the Closing, the Estimated Closing

Cash shall be reconciled to the actual cash balance (the "Closing

Cash") in accordance with Section 2.2.3.3 below (the "Closing Cash

Adjustment"), which adjustment may result in an addition or reduction

to the Price Amount adjustment made at the Closing as set forth in

Section 2.2.3.3(ii) and the paragraphs and Schedules corresponding

thereto. In the event the calculation of Estimated Closing Cash is in

excess of $220,000, Seller shall remit such excess (Estimated Closing

Cash minus $220,000) to Buyer within two (2) business days after the

Closing Date. Any remittance of cash to Buyer by Seller shall be made

in accordance with Buyer's written instructions that are received by

Seller at least two (2) business days prior to the required remittance

date.

2.2.3 Closing Net Working Capital Adjustment; Closing Cash

Adjustment.

2.2.3.1 Between sixty (60) and ninety (90) days after

the Closing Date, Seller shall prepare and deliver to Buyer a

(i) statement of the Closing Net Working Capital (the

"Statement of Closing Net Working Capital"), and (ii)

statement of Closing Cash (the "Statement of Closing Cash").

During such period, Buyer shall have observation rights with

respect to the preparation of the Statement of Closing Net

Working Capital and the Statement of Closing Cash. The

Statement of Closing Net Working Capital shall be based upon

the books and records of Seller and shall be prepared in

accordance with GAAP and the form set forth as, and in

accordance with the directives set forth in, Schedule 2.2.1.

The Statement of Closing Cash shall be based upon the books

and records of Seller and shall be prepared in conformity with

the form and in accordance with the directives set forth in

the various Schedules 2.2.3.3 hereof.

2.2.3.2 The Statement of Closing Net Working Capital

and the Statement of Closing Cash shall respectively be final

and binding on the Parties unless Buyer shall, within

forty-five (45) days following the delivery of the date when

Buyer has received both the (i) Statement of Closing Net

Working Capital, and (ii) Statement of Closing Cash, deliver

to Seller written notice of disagreement with either or both

of such statements, which notice(s) shall describe the nature

of any such disagreement in reasonable detail, identify the

specific items involved and the dollar amount of each such

disagreement. Buyer shall provide reasonable supporting

documentation for each of the specific items involved

concurrently with the delivery of the respective notice(s).

After the end of such forty-five (45) day period, Buyer may

not introduce additional

<PAGE>

disagreements with respect to any item in the Statement of

Closing Net Working Capital or the Statement of Closing Cash.

If Buyer shall raise any objections within the aforesaid

forty-five (45) day period, then Buyer and Seller shall

attempt to resolve the objections. If Buyer and Seller are

unable to resolve all objections within forty-five (45) days

of receipt by Seller of Buyer's written notice of

disagreement, or such longer period as may be agreed by Buyer

and Seller, then, within forty-five (45) days thereafter,

Buyer and Seller jointly shall select an arbitrator from a

nationally recognized independent public accounting firm that

is not the independent auditor of either Buyer or Seller. If

Buyer and Seller are unable to select an arbitrator within

such time period, the American Arbitration Association shall

make such selection (the Person so selected by either the

Parties or the American Arbitration Association shall be

referred to herein as the "Accounting Arbitrator"). The

Accounting Arbitrator will consider only those items and

amounts set forth in the Statement of Closing Net Working

Capital and/or the Statement of Closing Cash as to which the

Parties have disagreed within the time periods and on the

terms specified above and must resolve the matter in

accordance with the terms and provisions of this Agreement. In

submitting a dispute to the Accounting Arbitrator, each of the

Parties shall concurrently furnish, at its own respective

expense, to the Accounting Arbitrator and the other Party such

documents and information as the Accounting Arbitrator may

request. Each Party may also furnish to the Accounting

Arbitrator such other information and documents as it deems

relevant, with copies of such submission and all such

documents and information being concurrently given to the

other Party. Neither Party shall have or conduct any

communication, either written or oral, with the Accounting

Arbitrator without the other Party, respectively, either being

present or receiving a concurrent copy of any written

communication. The Accounting Arbitrator shall conduct one

conference concerning the objections and disagreements between

Buyer and Seller, at which conference each Party shall have

the right to (i) present its documents, materials and other

evidence (previously provided to the Accounting Arbitrator and

the other Party), and (ii) have present its or their advisors,

accountants, counsel and other representatives. Such

conference shall take place either telephonically and/or at

the offices of the Accounting Arbitrator, in the Accounting

Arbitrator's discretion, and not exceed more than three (3)

days, eight (8) hours each day, of hearings, or such other

period of time reasonably determined by the Accounting

Arbitrator to be required. The Accounting Arbitrator shall

resolve each item of disagreement based solely on the

presentations and supporting material provided by the Parties

and not pursuant to any independent review (the foregoing,

however, shall not preclude the Accounting Arbitrator from

independent research of facts or determining proper

application of GAAP or the terms of this Agreement, as the

case may be, with respect to the subject matter of the

objections and disagreement between the Parties). The

Accounting Arbitrator shall issue a detailed written report

that sets forth the resolution of all items in dispute and

that contains, as applicable, a (i) final Statement of Closing

Net Working Capital, and/or (ii) final Statement of Closing

Cash, according to the dispute(s) noticed. Such report(s)

shall be final and binding upon the Parties (and their

successors and permitted

<PAGE>

assigns). The Accounting Arbitrator shall circulate a

preliminary report(s) for the comment of the Parties. The fees

and expenses of the Accounting Arbitrator incurred in

connection with the determination of the disputed items by the

Accounting Arbitrator shall be borne equally by Buyer and

Seller. Buyer and Seller shall cooperate fully with the

Accounting Arbitrator and respond on a timely basis to all

requests for information or access to documents or personnel

made by the Accounting Arbitrator or by other Parties hereto,

all with the intent to fairly and in good faith resolve all

disputes relating to the Statement of Closing Net Working

Capital and/or Statement of Closing Cash as promptly as

reasonably practicable.

2.2.3.3 If the amount representing:

(i) Closing Net Working Capital as reflected

in the Statement of Closing Net Working Capital as

finally determined in accordance with this Section

2.2 (the "Final Closing Net Working Capital") is:

(A) less than the Estimated Closing

Net Working Capital, and the Final Closing

Net Working Capital is $750,000 or less,

then the Price Amount shall be decreased on

a dollar-for-dollar basis by the lesser of

the difference between (x) the Final Closing

Net Working Capital and $750,000, or (y) the

Final Closing Net Working Capital and the

Estimated Closing Net Working Capital, as

set forth in the examples to Section

2.2.3.3(i)(A) set forth in Schedule

2.2.3.3(i);

(B) more than the Estimated Closing

Net Working Capital, and the Estimated

Closing Net Working Capital was $750,000 or

less (if estimated working capital was

$750,000 or more, use $750,000), then the

Price Amount shall be increased on a

dollar-for-dollar basis by the amount of the

difference between (x) the Final Closing Net

Working Capital (which amount for purposes

of this calculation shall not exceed

$750,000), and (y) the Estimated Closing Net

Working Capital (which shall not exceed

$750,000 for purposes of this calculation),

as set forth in the examples to Section

2.2.3.3(i)(B) set forth in Schedule

2.2.3.3(i);

(ii) Closing Cash as reflected in the

Statement of Closing Cash as finally determined in

accordance with this Section 2.2 (the "Final Closing

Cash") is:

(A) greater than $220,000, and

there (i) are Seller's Reorganization

Expenses, and (ii) was no adjustment to the

Price Amount pursuant to Section 2.2.2, then

the difference between Final Closing Cash

and $220,000, plus the amount of Seller's

Reorganization Expenses, shall reduce the

amount of cash that may be retained by

Seller. The foregoing shall be computed

<PAGE>

and proofed by the method and in the form

set forth in Schedule 2.2.3.3(ii)(A); or

(B) greater than $220,000, and

there (i) are Seller's Reorganization

Expenses, and (ii) was an adjustment on the

Closing Date to the Price Amount based on

the calculation of Estimated Closing Cash

pursuant to Section 2.2.2, the sum of (x)

the difference between the Final Closing

Cash and $220,000, plus (y) the sum of (1)

the adjustment to the Price Amount which

increased Calculated Share Consideration on

the Closing Date pursuant to Section 2.2.2,

and (2) the amount of Seller's

Reorganization Expenses, shall reduce the

amount of cash that may be retained by

Seller. The foregoing shall be computed and

proofed by the method and in the form set

forth in Schedule 2.2.3.3(ii)(B); or

and there (i) are Seller's Reorganization

Expenses, and (ii) was no adjustment on the

Closing Date to the Price Amount pursuant to

Section 2.2.2, then (x) the amount of

Seller's Reorganization Expenses, minus (y)

any increase to the Price Amount (to a

maximum of $30,000) due to the difference

between $220,000 and Final Closing Cash. The

foregoing shall reduce the amount of cash

that may be retained by Seller and the

foregoing shall be computed and proofed in

the form set forth in Schedule

2.2.3.3(ii)(C); or

(D) equal to or less than $220,000,

there was an adjustment to the Price Amount

and both Estimated Closing Cash and Final

Closing Cash are $190,000 or less, and there

are Seller's Reorganization Expenses, then

the amount of Seller's Reorganization

Expenses shall reduce the amount of cash

that may be retained by Seller. The

foregoing shall be computed and proofed by

the method and in the form set forth in

Schedule 2.2.3.3(ii)(D); or

(E) equal to or less than $220,000,

there was an adjustment to the Price Amount

and both Estimated Closing Cash and Final

Closing Cash are $190,000 or more and

Estimated Closing Cash is greater than Final

Closing Cash, and there are Seller's

Reorganization Expenses, then the sum of (i)

Seller's Reorganization Expenses, minus (ii)

the difference between Final Closing Cash

and Estimated Closing Cash shall reduce the

amount of cash that may be retained by

Seller. The foregoing shall be computed and

proofed by the method and in the form set

forth in Schedule 2.2.3.3(ii)(E); or

(F) equal to or less than $220,000,

there was an adjustment to the Price Amount

and both Estimated Closing Cash and Final

Closing Cash are $190,000 or more and

Estimated

<PAGE>

Closing Cash is less than Final Closing

Cash, and there are Seller's Reorganization

Expenses, then the sum of (i) Seller's

Reorganization Expenses, plus (ii) the

difference between Final Closing Cash and

Estimated Closing Cash shall reduce the

amount of cash that may be retained by

Seller. The foregoing shall be computed and

proofed by the method and in the form set

forth in Schedule 2.2.3.3(ii)(F); or

(G) equal to or less than $220,000,

there was an adjustment to the Price Amount

and Estimated Closing Cash is less than or

equal to $190,000 and Final Closing Cash is

greater than $190,000, and there are

Seller's Reorganization Expenses, then the

sum of (i) Seller's Reorganization Expenses,

plus (ii) the difference between Final

Closing Cash and $190,000 shall reduce the

amount of cash that may be retained by

Seller. The foregoing shall be computed and

proofed by the method and in the form set

forth in Schedule 2.2.3.3(ii)(G); or

(H) equal to or less than $220,000,

there was an adjustment to the Price Amount

and Estimated Closing Cash is greater than

$190,000 and Final Closing Cash is less than

$190,000, and there are Seller's

Reorganization Expenses, then the sum of (i)

Seller's Reorganization Expenses, minus (ii)

the difference between Estimated Closing

Cash and $190,000 shall reduce the amount of

cash that may be retained by Seller. The

foregoing shall be computed and proofed by

the method and in the form set forth in

Schedule 2.2.3.3(ii)(H).

If the calculation set forth in Section 2.2.3.3(i) above

results in a decrease or increase in the Price Amount, then the amount

of such decrease or increase shall be divided by the Share

Consideration Price to compute the number of shares of Buyer's Common

Stock (computed to the next whole share) to be claimed by Buyer or

Seller, as applicable, in settlement of the adjustment (the "Final

Closing Net Working Capital Adjustment"). Upon such final determination

(i) if the Price Amount is decreased, then Buyer shall have the right

to claim the shares computed from the Escrow Agent and the Escrow Agent

shall be authorized to distribute such shares from the Escrow Shares in

accordance with the procedures set forth in the Escrow Agreement, or

(ii) if the Price Amount is increased, then Buyer shall issue the

additional shares and share certificates of Buyer's Common Stock as

Share Consideration (i) ninety percent (90%) to Seller, and (ii) ten

percent (10%) to the Escrow Agent within five (5) business days after

such determination.

If the calculation set forth in Section 2.2.3.3(ii) above

results in a reduction of the cash allowed to be retained by Seller,

then upon such final determination Seller shall, within five (5)

business days after such determination, remit to Buyer the amount of

such reduction (less any amount previously remitted by Seller in

accordance with Section 2.2.2) in accordance with Buyer's written

instructions

<PAGE>

that are received by Seller at least two (2) business days prior to the

required remittance date.

2.3 The Closing. The transactions contemplated by this Agreement shall

be consummated (the "Closing") at the offices of Manatt, Phelps & Phillips, LLP,

1001 Page Mill Road, Building #2, Palo Alto, California 94304, at 10:00 a.m.

local time on or before June 30, 2004, or at such other time or place as the

Parties shall mutually agree (the "Closing Date"). The Closing shall be

effective at 12:01 a.m. on the Closing Date.

2.3.1 Actions at the Closing. At the Closing:

2.3.1.1 Buyer shall deliver to Seller one or more

stock certificates, as directed by Seller in writing at least

three (3) days prior to the Closing Date, representing (in the

aggregate) the Closing Shares in accordance with Section

2.1.3.1 above;

2.3.1.2 Buyer shall deliver to the Escrow Agent a

stock certificate representing the Escrow Shares in accordance

with Section 2.1.3.2 above;

2.3.1.3 Seller shall execute and deliver to Buyer the

Bill of Sale and Assignment of Acquired Assets (Exhibit G),

the Assignment of Copyrights (Exhibit H), the Patent

Assignment (Exhibit I), the Trademark Assignment (Exhibit J),

the Registered Domain Name Assignment (Exhibit K), the

Assignment and Assumption Agreement (Exhibit L), the Real

Property Sublease Agreement (Exhibit M), and all other bills

of sale, endorsements, assignments and other instruments as

Buyer shall reasonably request or as necessary or appropriate

to sell, convey, assign, transfer and deliver to Buyer good

title, free and clear of all liens or encumbrances to all the

Acquired Assets and to evidence the due execution, delivery

and performance of the Agreement and satisfaction of the

conditions to the obligations of Buyer under this Agreement

(collectively, the "Collateral Agreements");

2.3.1.4 Seller shall deliver to Buyer (i) UCC

termination statements duly executed by the holders of all

security interests with respect to all outstanding UCC-1

financing statements evidencing security interests in any of

the Acquired Assets, and (ii) evidence, satisfactory to Buyer,

of termination and/or release of all security agreements,

security interests or guarantees affecting or relating to the

Acquired Assets to the extent reasonably required to provide

Buyer with clear title to the Acquired Assets;

2.3.1.5 Seller and Buyer shall execute and deliver

the Escrow Agreement;

2.3.1.6 Buyer shall execute and deliver to Seller the

Assignment and Assumption Agreement and the Real Property

Sublease Agreement;

2.3.1.7 Each of Buyer and Seller shall deliver the

items required under Articles 7 and 8, respectively; and

<PAGE>

2.3.1.8 Each of Buyer and Seller shall deliver such

documents and instruments as reasonably requested and required

by the other Party as is customary for a transaction of this

kind and type in order to properly effect the transactions

contemplated hereby.

2.4 Certain Restrictions on Sale of Share Consideration. Seller shall

be free to re-distribute the Share Consideration upon its receipt from Buyer in

order to satisfy Seller's liabilities and obligations to Seller's shareholders,

subject to compliance with applicable securities laws and the contractual

restrictions set forth in this Section 2.4. The stock certificates representing

Closing Shares shall bear appropriate legends to implement the following

transfer restrictions (and Buyer's transfer agent shall be instructed

accordingly). If, after the Closing, Seller so distributes all or any portion of

the Closing Shares to its shareholders, then neither David H. Parish nor Daniel

E. Sullivan shall sell more than (i) twenty-five percent (25%) of his respective

Closing Shares during the first ninety (90) days after the Closing, (ii) fifty

percent (50%) of his respective Closing Shares during the first one hundred

eighty (180) days after the Closing, and (iii) seventy-five percent (75%) of his

respective Closing Shares during the first two hundred seventy (270) days after

the Closing. After such 270 days following the Closing, all restrictions on

sales of the Share Consideration shall terminate. The foregoing restrictions

with respect to Messrs. Parish and Sullivan on sales during the 270-day period

following the Closing shall not apply to: (i) any sale or disposition pursuant

to a tender offer made to substantially all of Buyer's stockholders, or (ii) any

sale or disposition of Buyer's Common Stock in a merger, reorganization,

recapitalization, business combination, or similar transaction approved by

Buyer's stockholders.

2.5 Purchase Price Allocation. Promptly following the Closing, Buyer

shall prepare a mutually agreed allocation of the purchase price in accordance

with Section 1060 of the Code. Buyer shall consult with Seller on same before

finalizing such allocation. Each of the Parties agrees to report this

transaction for state, federal and other Tax purposes in accordance with this

final allocation of the purchase price and not to file any Tax Return or report

or otherwise take a position with federal, state or other tax authorities which

is inconsistent with such allocation.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES REGARDING

SELLER, BUSINESS AND ACQUIRED ASSETS

Except as set forth in the Disclosure Schedules of the Seller Disclosure Letter

(which shall specifically reference the Sections of this Agreement to which the

Disclosure Schedule therein applies as set forth in this Article 3), Seller

represents and warrants to Buyer as follows as of the date of this Agreement and

the Closing Date (except as specifically represented as to a specific date set

forth herein):

3.1 Good Standing and Authority.

3.1.1 Seller is a corporation organized, existing and in good

standing under the laws of the State of Minnesota, and is in good

standing and qualified to do business as a foreign corporation in the

states set forth in Disclosure Schedule 3.1.1.

<PAGE>

3.1.2 Seller has all requisite corporate power and authority

to enter into this Agreement and the Collateral Agreements and to

consummate the transactions contemplated hereby and thereby. At the

Closing, the execution and delivery of this Agreement by Seller and the

consummation by Seller of the transactions contemplated by this

Agreement shall have been duly authorized by all requisite corporate

action of Seller, including, but not limited to, approval of the

transaction by the stockholders of Seller and any creditor whose

consent is required by contract or Applicable Law. Subject to the

approval of the stockholders of the Company in accordance with

Applicable Law, this Agreement has been duly executed and delivered by

and shall constitute the valid and binding obligations of Seller

enforceable in accordance with its terms, subject to and limited by

applicable bankruptcy, insolvency, reorganization, moratorium, and

other Applicable Laws and equitable principles relating to or affecting

creditor's rights.

3.2 Title to and Condition and Sufficiency of Acquired Assets. Except

as set forth in Disclosure Schedule 3.2, Seller has good and marketable title to

all of the Acquired Assets, all of the Acquired Assets are free and clear of

restrictions on or conditions to transfer or assignment, and at the Closing,

Seller shall sell, convey, assign, transfer and deliver to Buyer title to the

Acquired Assets, free and clear of any mortgages, liens, pledges, encumbrances,

claims, conditions and restrictions, of any nature whatsoever, direct or

indirect, whether accrued, absolute, contingent or otherwise. Except as set

forth in Disclosure Schedule 3.2, the Acquired Assets constitute all of the

assets, properties, rights, contracts and Intellectual Property Rights (as

defined in Section 3.5.1) that are necessary or required for the continued

conduct of the Business, without (i) the need to purchase, license or acquire

any other material asset or property, (ii) violating any contractual rights of

any Third Party, or (iii) infringing, misappropriating or misusing any software

or Intellectual Property Rights of any Third Party. Except as set forth in

Disclosure Schedule 3.2, the Acquired Assets are all located at Seller's

principal place of business in the City of Fridley, State of Minnesota.

3.3 Noncontravention. Except as set forth in Disclosure Schedule 3.3,

neither the execution or the delivery of this Agreement, nor the consummation of

the transactions contemplated by this Agreement, shall (i) violate any

Applicable Law, Injunction, judgment, order, decree, ruling, charge or other

restriction of any Governmental Body to which Seller or the Acquired Assets is

subject or any provision of the articles of incorporation or bylaws of Seller,

or (ii) conflict with, result in a breach of, constitute a default under, result

in the acceleration of, create in any Person the right to accelerate, terminate,

modify or cancel, or require any notice under any agreement, contract, lease,

license, instrument, lien, security interest or other arrangement to which

Seller is a party or by which Seller is bound or to which any of the Acquired

Assets is subject (or result in the imposition of any security interest upon any

of its assets) except where such violation, conflict, breach, default,

acceleration, termination, modification, cancellation, failure to give notice or

security interest would not have a Material Adverse Effect on the Acquired

Assets or on the ability of Seller to consummate the transactions contemplated

by this Agreement. Except as set forth in Disclosure Schedule 3.3, Seller does

not need to give any notice to, make any filing with, or obtain any

authorization, consent or approval of any Governmental Body in order for the

Parties to consummate the transactions contemplated by this Agreement.

<PAGE>

3.4 Compliance with Applicable Law; Litigation. Seller is in compliance

with all Applicable Laws the violation of which would have a Material Adverse

Effect on the Acquired Assets or on the ability of Seller to consummate the

transactions contemplated by this Agreement. There is no action, suit,

Proceeding or, to the Knowledge of Seller, investigation in progress or pending

before any Governmental Body, and there is no threat thereof against or relating

to Seller or its properties, assets or Business, nor, to the Knowledge of

Seller, is there any basis for any such claim, suit or other Proceeding which

might have a Material Adverse Effect on the Acquired Assets. Except as set forth

in Disclosure Schedule 3.4, there is no suit, action or other Proceeding, or to

the Knowledge of Seller any investigation, commenced, pending or threatened

against or affecting Seller in or before any Governmental Body, in which it is

sought to restrain, prohibit or otherwise adversely affect the ability of Seller

to perform any or all of the obligations required of it under this Agreement or

the consummation of the transactions contemplated by this Agreement.

3.5 Intellectual Property.

3.5.1 For purposes of this Agreement, "Intellectual Property

Rights" means patents (including any and all claims under patents,

applications for patents, continuations, continuations-in-part,

counterparts and reissues), copyrights (registered and unregistered),

trade marks, service marks and trade names (registered and

unregistered), semiconductor mask work rights, rights in databases,

trade secret rights and any and all similar rights under any

jurisdiction.

3.5.2 Schedule 1.1.2 to this Agreement lists all trademarks

and applications therefor, tradenames, copyright registrations and

applications therefor, patents, patent applications and unfiled

disclosures that are related to or used in connection with the Business

(the "Registered Intellectual Property"). Except as set forth on

Disclosure Schedule 3.5.2: (i) trademark applications, patent

applications and copyrights within the Registered Intellectual Property

are currently in compliance with all legal requirements, (ii) all

issued trademarks and patents constituting Registered Intellectual

Property are, to the Knowledge of Seller, valid and enforceable, (iii)

no (A) Transferred Trademark or trademark constituting Registered

Intellectual Property has been or is now involved in any cancellation

Proceeding and, to the Knowledge of Seller, no action or Proceeding is

threatened with respect to such trademarks by any Third Party

contesting Seller's rights to same, and (B) no copyright has been or is

now being contested by any Third Party, and, to the Knowledge of

Seller, no action or Proceeding is threatened with respect to such

constituting Registered Intellectual Property is now, to the Knowledge

of Seller, involved in any interference, reissue, re-examination,

opposition or any other Proceeding contesting Seller's rights to same.

3.5.3 Except as set forth on Disclosure Schedule 3.5.3, Seller

exclusively owns, or to the extent indicated in Schedule 1.1.2 has the

right to non-exclusive use pursuant to a written license or agreement,

all Intellectual Property Rights related to or used in the Business.

<PAGE>

3.5.4 Except as indicated in Schedule 1.1.2 and as set forth

on Disclosure Schedule 3.5.4, Seller has taken commercially reasonable

steps to protect its Intellectual Property Rights used in or related to

the Business.

3.5.5 Except as set forth on Disclosure Schedule 3.5.5, all of

Seller's Employees that have participated in the development of the

Intellectual Property Rights related to or used in the Business have

entered into employee agreements with Seller assigning all right, title

and interest in Intellectual Property Rights created within the scope

of their employment to Seller. Disclosure Schedule 3.5.5 lists all

Third Party consultants or contractors that have participated in the

development of the Intellectual Property Rights related to or used in

the Business. Except as set forth on Disclosure Schedule 3.5.5, all

such Third Parties have entered into agreements with Seller assigning

all right, title and interest in the Intellectual Property therein to

Seller and, pursuant to such agreements or Applicable Law, Seller owns

all of the right, title and interest of its Employees and Third Party

contractors and consultants to the Intellectual Property Rights in the

Acquired Assets.

3.5.6 Except as set forth on Disclosure Schedule 3.5.6, to the

Knowledge of Seller, (i) the operation and conduct of the Business does

not infringe upon, or otherwise violate the rights of any Third Party

with respect to any Intellectual Property Rights, (ii) no Proceedings

have been instituted or threatened, nor has any claim been made, nor

does Seller know with reasonable certainty of any basis for any such

claims to be threatened or made against Seller alleging any such

infringement or violation.

3.5.7 Except as set forth on Disclosure Schedule 3.5.7, to the

Knowledge of Seller, no Third Party has infringed upon or

misappropriated, or diluted or otherwise violated any Intellectual

Property Rights in the Products or otherwise used in or related to the

Business, and no such claims have been brought against any Third Party

by Seller.

3.5.8 Disclosure Schedule 3.5.8 sets forth the Intellectual

Property Rights presently used in the Business that have heretofore

been assigned, transferred, licensed or otherwise made available to any

Third Party, including under any license agreements.

3.5.9 With respect to each item of Transferred Intellectual

Property and Intellectual Property Rights related to or used in the

Business, except as set forth on Disclosure Schedule 3.5.9, (i) Seller

owns all such items free and clear of any security interest, (ii) the

item is not subject to any outstanding Injunction, judgment, order,

decree, ruling or charge, (iii) no action, suit, Proceeding, hearing,

charge, complaint, claim or demand, or to the Knowledge of Seller any

investigation, is pending or is threatened which challenges the

legality, validity, enforceability, use or ownership of the item, and

to the Knowledge of Seller, there is no reasonable basis therefor, and

(iv) Seller has not agreed to indemnify any Person for or against any

infringement or misappropriation with respect to the item.

3.5.10 Schedule 1.1.2 identifies each item of Transferred

Intellectual Property and Intellectual Property Rights used in or

related to the Business that is owned by a Third Party and is used

pursuant to license or agreement. Except as set forth on

<PAGE>

Disclosure Schedule 3.5.10, Seller has provided Buyer with correct and

complete copies of all such licenses and agreements, and Seller is in

compliance with all material terms of all such licenses or agreements.

Except as set forth on Disclosure Schedule 3.5.10, to the Knowledge of

Seller, with respect to each such Third Party license or agreement, (i)

the underlying item is not subject to any outstanding Injunction,

judgment, order, decree, ruling or charge, (ii) no action, suit,

Proceeding, hearing, investigation, charge, complaint, claim or demand

is pending or is threatened which challenges the legality, validity,

enforceability, use or ownership of such Third Party license or

agreement, (iii) Seller has not granted any sublicense or similar right

with respect to such Third Party license or agreement, and (iv) with

respect to Seller, the Third Party license or agreement is legal,

valid, binding, enforceable and in full force and effect and will

continue to be legal, valid, binding, enforceable and in full force and

effect on identical terms following the consummation of the

transactions contemplated by this Agreement, subject to Applicable Laws

of bankruptcy, insolvency, moratorium, and other Applicable Laws and

equitable principles generally affecting creditor's rights.

3.5.11 Except as set forth on Disclosure Schedule 3.5.11, the

software included in the Transferred Intellectual Property does not

include, contain or depend on a link established at runtime to any

software made available as "open source" software (i.e., under a

license that requires the source code version of the software, together

with any improvements or derivative works, to be made generally

available) and does not contain any software code owned by a Third

Party.

3.5.12 Except as set forth on Disclosure Schedule 3.5.12, the

software delivered to Buyer as part of the Products is all of the

software that comprises the Products (including previous versions and

any software from which the Products were derived, in both source code

and object code form), all components, modules and programs

constituting the Products, and all software that Seller has used to

compile, develop or maintain the Products.

3.5.13 Except as set forth on Disclosure Schedule 3.5.13 and

to the Knowledge of Seller, the Products transferred under this

Agreement do not contain known worms, Trojan horses and other

infections or harmful routines. Disclosure Schedule 3.5.13 sets forth

any and all bugs, errors, or problems of which Seller has Knowledge

that could reasonably be expected to materially disrupt the operation

of the Products or have an adverse impact on the operation of other

software programs or operating systems used by the Products.

3.6 Agreements, Contracts and Commitments. Except as otherwise

contemplated by this Agreement or as set forth on Disclosure Schedule 3.6,

Seller is not a party to, or bound by:

3.6.1 any agreement, contract, or commitment relating to the

disposition or acquisition of assets or any interest in any business

enterprise relating directly or indirectly to the Business, any

Acquired Asset or any Key Employee;

<PAGE>

3.6.2 other than indemnification or guaranty provisions set

forth in the Assigned Contracts, any agreement of indemnification or

guaranty relating directly or indirectly to the Business, any Acquired

Asset or any Key Employee;

3.6.3 any agreement for which completion of performance by

Seller (without giving effect to the transactions contemplated hereby)

under the terms of such agreement would be reasonably likely to result

in a Material Adverse Effect on the Business or any Acquired Asset;

3.6.4 any agreement (or group of related agreements) that

imposes any restrictions on the marketing, license and distribution of

the Products);

3.6.5 any mortgages, indentures, loans or credit agreements,

security agreements or other agreements or instruments relating to the

borrowing of money by Seller or extension of credit to Seller under

which any Person has imposed any lien on any of the Acquired Assets;

3.6.6 any distribution, joint marketing, development,

partnership or joint venture agreement relating to the Business or the

Acquired Assets;

3.6.7 any agreement pursuant to which Seller has granted, or

may grant in the future, to any Person a source code license or option

or other right to use or acquire source code affecting the Business or

any Acquired Asset;

3.6.8 any employment agreement, non-competition,

non-solicitation or other agreement, with the exception of stock option

agreements, warrant grants or agreements and similar incentive

compensation arrangements which utilize equitable interests in the

Company, with any Key Employee, Technical Transferred Employee or

Transferred Employee;

3.6.9 any agreement, contract or commitment containing any

covenant limiting in any respect the right of Seller to engage in any

line of business or to compete with any Person; or

3.6.10 any agreement pursuant to which Seller has agreed to,

or assumed, any obligation or duty to warrant, indemnify, hold harmless

or otherwise assume or incur any obligation or liability with respect

to the infringement or misappropriation by Seller or any Person of the

Intellectual Property.

Except as set forth on Disclosure Schedule 3.6, (i) Seller has not breached,

violated or defaulted under any of the terms of or conditions of any Assigned

Contract, (ii) each of the Assigned Contracts is in full force and effect and,

to the Knowledge of Seller, is not subject to any default thereunder by any

Person obligated to Seller pursuant thereto, and (iii) to the Knowledge of

Seller, following the Closing, Buyer shall be permitted to exercise all of

Seller's rights under the Assigned Contracts to the same extent Seller would

have been able to had the transactions contemplated by this Agreement not

occurred and without the payment of any additional amounts or consideration

other than ongoing fees, royalties or payments which Seller would otherwise be

required to pay.

<PAGE>

3.7 Insurance. Except as set forth on Disclosure Schedule 3.7, (i)

there is no claim by Seller pending under any insurance policy or fidelity bond

covering the Acquired Assets, (ii) all premiums that are due and payable under

all such policies and bonds have been paid, (iii) Seller is otherwise in

compliance with the terms of all such policies and bonds, and (iv) policies of

insurance and bonds are of the type and in amounts customarily carried by

Persons conducting businesses similar to those of Seller in the jurisdictions in

which Seller operates.

3.8 Tax Matters. Except as set forth on Disclosure Schedule 3.8:

3.8.1 To the extent relevant to the Acquired Assets or the

Business, Seller has prepared and timely filed all required federal,

state, local and foreign returns, estimates, information statements and

reports ("Returns") relating to any and all Taxes concerning or

attributable to Seller, the Acquired Assets or the operations of the

Business and such Returns are true and correct and have been completed

in accordance with Applicable Law.

3.8.2 To the extent failure to do so could adversely affect

Buyer's use or ownership of the Acquired Assets or operation of the

Business, Seller (i) has paid all Taxes it is required to pay, and (ii)

has withheld with respect to its Employees all federal, state and

foreign income Taxes and social security charges and similar fees,

Federal Insurance Contribution Act, Federal Unemployment Tax Act and

other Taxes required to be withheld on wages paid to them.

3.8.3 To the extent failure to do so could adversely affect

Buyer or Buyer's use or ownership of the Acquired Assets or operation

of the Business, Seller has not been delinquent in the payment of any

Tax, nor is there any Tax deficiency outstanding, assessed or proposed

against Seller, nor has Seller executed any waiver of any statute of

limitations on or extending the period for the assessment or collection

of any Tax.

3.8.4 To the Knowledge of Seller, no audit or other

examination of any Return of Seller by any Governmental Body is

presently in progress, nor has Seller been notified of any request for

such an audit or other examination.

3.8.5 Seller does not have, and knows no factual basis for the

assertion of any claim for any liabilities for unpaid Taxes for which

Buyer would become liable as a result of the transactions contemplated

by this Agreement and the Collateral Agreements.

3.8.6 To the Knowledge of Seller, (i) there are no liens on

the Acquired Assets relating to or attributable to Taxes, and (ii)

Seller knows of no reasonable basis for the assertion of any claim

relating or attributable to Taxes which, if adversely determined, would

result in any lien on the Acquired Assets.

3.9 Employee and Labor Matters.

3.9.1 Except as contemplated by this Agreement or as set forth

on Disclosure Schedule 3.9.1, to the Knowledge of Seller: (i) no Key

Employee has any present intention to terminate his employment with

Seller prior to the Closing, (ii) no Key

<PAGE>

Employee has received an offer to join a business that may reasonably

be expected to be competitive with the Business or Buyer's business,

and (iii) no Key Employee is a party to or is bound by any

confidentiality agreement, non-competition agreement or other contract

(with any Person) that may reasonably be expected to have an adverse

effect on the performance by such Key Employee of any of his duties or

responsibilities as an employee of Buyer subsequent of the consummation

of the transactions contemplated by this Agreement and the Collateral

Agreements.

3.9.2 Disclosure Schedule 3.9.2 contains a list of each plan,

program, policy, practice or contract providing for employment,

compensation, deferred compensation, severance, retirement, relocation,

repatriation, expatriation, termination pay, performance awards, stock

or stock-related awards, fringe benefits or other benefits, including

each "employee benefit plan" within the meaning of Section 3(3) of the

United States Employee Retirement Income Security Act of 1974, as

amended ("ERISA") which is or has been maintained, contributed to, or

required to be contributed to by Seller or any affiliate within the

meaning of Section 414(b) or (c) of the Code and the regulations

thereunder ("ERISA Affiliate") for the benefit of any employee or with

respect to which Buyer may have any liability, obligation or

commitment.

3.9.3 Except as set forth on Disclosure Schedule 3.9.3, (i) no

work stoppage or labor strike against Seller or any ERISA Affiliate is

pending, or, to the Knowledge of Seller, threatened involving any of

its Employees, (ii) Seller and any ERISA Affiliate does not know of any

activities or Proceedings of any labor union to organize any of its

Employees, (iii) there are no actions, suits, claims, labor disputes or

grievances pending, or, to the Knowledge of Seller or any ERISA

Affiliate, threatened relating to any labor, safety or discrimination

matters involving any Employee, including, without limitation, charges

of unfair labor practices or discrimination complaints, and (iv)

neither Seller nor any ERISA Affiliate is a party to, or bound by, any

collective bargaining agreement or union contract with respect to any

Employees and no collective bargaining agreement is currently being

negotiated by Seller or any ERISA Affiliate.

3.9.4 Except as set forth on Disclosure Schedule 3.9.4, Seller

and any ERISA Affiliate (i) are in compliance in all respects with all

Applicable Laws respecting employment, employment practices, terms and

conditions of employment and wages and hours, in each case, with

respect to the Employees, (ii) have withheld and reported all amounts

required by Applicable Law or by agreement to be withheld and reported

with respect to wages, salaries, and other payments to the Employees,

(iii) are not liable for any arrears of wages or any Taxes or any

penalty for failure to comply with any of the foregoing, and (iv) are

not liable for any payment to any trust or other fund governed by or

maintained by or on behalf of any Governmental Body, with respect to

unemployment compensation benefits, social security or other benefits

or obligations for Employees of Seller.

3.9.5 Except as set forth on Disclosure Schedule 3.9.5: (i)

Seller has performed in all material respects all obligations required

to be performed by it under each Seller Plan and each Seller Plan has

been established and maintained in all material respects in accordance

with its terms and in compliance with all applicable legal

<PAGE>

requirements, including ERISA and the Code, (ii) at no time has Seller

or any ERISA Affiliate contributed to or been obligated to contribute

to any multi-employer plan (as defined in Section 3(37) of ERISA), to

any multiple employer plan, or to any plan described in Section 413 of

the Code, (iii) neither Seller nor any ERISA Affiliate has ever

sponsored, participated in or contributed to any pension plan that is

subject to Title IV of ERISA or Section 412 of the Code, and (iv) no

Seller Plan provides, or has any liability to provide, life insurance,

medical or other employee benefits to any Key Employee upon his

retirement or termination of employment for any reason, except as may

be required by statute, and neither Seller nor any of its ERISA

Affiliates has ever represented, promised or contracted (whether in

oral or written form) to any Key Employee (either individually or as a

group) that such Key Employee (or any other Person) would be provided

with life insurance, medical or other employee welfare benefits upon

their retirement or termination of employment, except to the extent

required by statute.

3.10 Powers of Attorney. Except as set forth on Disclosure Schedule

3.10, there are no outstanding powers of attorney executed on behalf of Seller

in respect of the Business or the Acquired Assets.

3.11 Books and Records. Except as set forth on Disclosure Schedule 3,11

(i) the books and records of Seller related to the Business and the Acquired

Assets (A) are accurate in all material respects, (B) have been materially

maintained in accordance with Applicable Laws and with generally accepted

practices and standards in the jurisdiction(s) in which Seller operates, (C) are

in Seller's possession or under its control, and (ii) the Acquired Assets

include all rights necessary to maintain records of the Business in the hands of

Seller, and Buyer shall not be dependent upon any other rights or to enable it

to continue to maintain the same consistent with the current practices of

Seller.

3.12 Product Warranties; Defects; Liabilities. Except as set forth on

Disclosure Schedule 3.12, (i) each Product manufactured, sold, licensed, leased

or delivered by Seller has been in conformity with all applicable contractual

commitments and all express and implied warranties except where the failure to

be in such conformity would not have a Material Adverse Effect with respect to

Seller, (ii) Seller does not have any liability (and to the Knowledge of Seller,

there is no current reasonable basis for any present or future action, suit,

Proceeding, hearing, investigation, charge, complaint, claim or demand against

any Product giving rise to any liability) for replacement or repair thereof or

other damages in connection therewith, and (iii) no Product manufactured, sold,

licensed, leased or delivered by Seller is subject to any guaranty, warranty or

other indemnity beyond the applicable standard terms and conditions of sale,

license or lease or beyond that implied or imposed by Applicable Law.

3.13 Indebtedness; Guarantees. Except as set forth on Disclosure

Schedule 3.13, Seller has no indebtedness for money borrowed or for the deferred

purchase price of property or services, capital lease obligations, conditional

sale or other title retention agreements relating to the Acquired Assets or the

Business. Except as set forth on Disclosure Schedule 3.6 above, Seller is not a

guarantor or otherwise liable for any liability or obligation of any Person.

3.14 Insolvency. No insolvency Proceedings of any character, including

bankruptcy, receivership, reorganization, composition or arrangement with

creditors, voluntary or

<PAGE>

involuntary, affecting the Business or any of the Acquired Assets are pending or

are threatened, and Seller has not made any assignment for the benefit of

creditors, or taken any other action which would constitute the basis for the

institution of such insolvency Proceedings. Upon consummation of the

transactions contemplated by this Agreement, Seller shall have, realizable

assets that exceed its liabilities, and upon consummation of the transactions

contemplated by this Agreement, Seller shall be able to pay its debts and other

obligations as they become due.

3.15 Financial Statements. Seller has furnished to Buyer true and

correct copies of the audited financial statements of Seller for the fiscal

years ended September 30, 2001, September 30, 2002, and September 30, 2003. Each

of such audited financial statements, including any notes thereto, fairly

presents the financial position of Seller as of its respective date, and the

results of operations for the periods covered in accordance with United States

generally accepted accounting principles, as applied consistently (except as may

be noted in the notes to such financial statements) by Seller ("GAAP")

throughout the periods indicated and as at the respective dates of such

financial statements. Seller has also furnished to Buyer true and correct copies

of the internally generated monthly financial statements of Seller since

September 30, 2003 (the "Balance Sheet Date"). Such internal monthly financial

statements of Seller fairly present the financial position of Seller as of their

respective dates in accordance with GAAP throughout the periods indicated and as

at the respective dates of such internal financial statements, except that such

internal financial statements are subject to year-end adjustments and lack

footnotes and other required presentation items.

3.16 Absence of Undisclosed Liabilities. Except as set forth on

Disclosure Schedule 3.16, other than the Assumed Liabilities, those liabilities

disclosed as of the Balance Sheet Date, and those liabilities arising in the

Ordinary Course of Business since the Balance Sheet Date, Seller has no

liabilities, contingent or otherwise.

3.17 Absence of Changes. Except as set forth on Disclosure Schedule

3.17, between the Balance Sheet Date and the date of this Agreement:

3.17.1 Seller has conducted the Business only in the Ordinary

Course of Business;

3.17.2 there has been no Material Adverse Change;

3.17.3 Seller has not mortgaged, pledged or otherwise

encumbered any of the Acquired Assets;

3.17.4 Seller has not sold, assigned, licensed, leased,

transferred or conveyed, or committed itself to sell, assign, license,

lease, transfer or convey, any of the Acquired Assets;

3.17.5 there has been no destruction of, damage to or loss of

any of the Acquired Assets;

3.17.6 Seller has not accelerated, terminated, modified or

cancelled any agreement, contract, lease or license (or series of

related agreements, contracts, leases and licenses) involving the

Business;

<PAGE>

3.17.7 except for the liabilities identified on the Seller

Disclosure Letter, has not delayed or postponed the payment of material

accounts payable and other liabilities relating to the Business;

3.17.8 Seller has not cancelled, compromised, waived or

released any right or claim (or series of related rights and claims)

relating to the Business;

3.17.9 Seller has not entered into any capital commitments in

relation to any of the Acquired Assets or the Business;

3.17.10 no litigation has been commenced or threatened and to

the Knowledge of Seller, no reasonable basis exists for any litigation,

Proceeding or investigation against Seller or, to the Knowledge of

Seller, any officer or director of Seller or any Key Employee,

Technical Transferred Employee or Transferred Employee, which is

related to the Business or the Acquired Assets;

3.17.11 there has been no notice of any claim or potential

claim of ownership by any Person other than Seller of the Intellectual

Property or of infringement by the Business of any other Person's

Intellectual Property Rights;

3.17.12 Seller has not received written notice of any claim or

potential claim, and to the Knowledge of Seller, no reasonable basis

exists for any claim or potential claim that Seller has infringed the

Intellectual Property Rights of any Person or entity; and

3.17.13 there has been no agreement by Seller or any

Employees, agents or affiliates of Seller to do any of the things

described in the preceding clauses of this Section 3.17 (other than

negotiations with Buyer and its representatives regarding the

transactions contemplated by this Agreement).

3.18 Certain Business Practices. Neither Seller nor any of its

directors, officers, agents or Employees has (i) used any funds for unlawful

contributions, gifts, entertainment or other unlawful expenses related to

political activity, (ii) made any unlawful payment to foreign or domestic

government officials or employees or to foreign or domestic political parties or

campaigns or violated any provision of the Foreign Corrupt Practices Act of

1977, as amended, or (iii) made any other unlawful payment.

3.19 Minnesota Bulk Sales Law. The State of Minnesota does not impose a

"bulk sales law" or its equivalent, and no filings or other compliance measures

related to bulk sales are required to effect the transactions contemplated by

this Agreement in accordance with Applicable Laws of the State of Minnesota.

3.20 Brokers. Except for the engagement of Delphi Financial

Corporation, which has been employed by Seller to render financial advice and a

fairness opinion, Seller has not employed or engaged any broker, finder, agent,

investment banker or other Third Party with respect to financial advisory

duties, nor has Seller otherwise dealt with any other Person purporting to act

in the capacity of any such financial advisor, in connection with the

transactions contemplated hereby.

<PAGE>

3.21 Information Supplied. None of the information supplied or to be

supplied by Seller, its auditors, attorneys, financial advisors or other

consultants or advisors for inclusion in (i) the registration statement on Form

S-4, and any amendment thereto, to be filed under the Securities Act of 1933, as

amended (the "Securities Act") with the SEC by Buyer in connection with the

issuance of the Share Consideration (the "S-4"), or (ii) the proxy statement and

any amendment or supplement thereto to be distributed in connection with

Seller's meeting of shareholders to vote upon this Agreement and the

transactions contemplated hereby (the "Proxy Statement" and, together with the

prospectus included in the S-4, the "Proxy Statement/Prospectus") will, in the

case of the Proxy Statement/Prospectus and any amendment or supplement thereto,

at the time of the meeting of shareholders of Seller to vote upon this Agreement

and the transactions contemplated hereby, or, in the case of the S-4, as amended

or supplemented, at the time it becomes effective and at the time of any

post-effective amendment thereto, contain any untrue statement of a material

fact or omit to state any material fact required to be stated therein or

necessary to make the statements therein, in light of the circumstances in which

they are made, not misleading to shareholders of Seller with respect to the

transactions contemplated by this Agreement. Seller makes no representation with

respect to information supplied by Buyer specifically for inclusion therein.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF BUYER

Except as set forth in the "Schedule of Exceptions" prepared by Buyer and

attached hereto, Buyer represents and warrants to Seller as follows:

4.1 Organization. Buyer is a corporation organized, existing and in

good standing under the laws of the State of Delaware and is in good standing

and qualified to do business as a foreign corporation in the State of California

and the State of Oregon.

4.2 Authority. Buyer has all requisite corporate power and authority to

enter into this Agreement and the Collateral Agreements and to consummate the

transactions contemplated hereby and thereby. The execution and delivery of this

Agreement and the consummation of the transactions contemplated by this

Agreement have been duly authorized by all requisite corporate action on the

part of Buyer, including the reservation of all Buyer Common Stock to be issued

pursuant to this Agreement. This Agreement has been duly executed and delivered

by and constitutes the valid and binding obligation, enforceable in accordance

with its terms, of Buyer, subject to and limited by applicable bankruptcy,

insolvency, reorganization, moratorium, and other Applicable Laws and equitable

principles relating to or generally affecting the enforcement of creditor's

rights.

4.3 Share Consideration and Capitalization.

4.3.1 Buyer's Common Stock to be issued as Share Consideration

pursuant to this Agreement has been duly reserved and authorized for

issuance and such Common Stock, when issued to Seller in accordance

with this Agreement, shall be validly issued, fully paid and

non-assessable, registered in accordance with the Securities Act, and

shall be issued in compliance with all Applicable Laws subject to any

restrictions on transfer contemplated by this Agreement.

<PAGE>

4.3.2 The authorized capital stock of Buyer consists of

100,000,000 shares of Buyer's Common Stock, par value $0.01 per share

and 3,000,000 shares of Buyer's Preferred Stock, $0.01 par value per

share, of which 920,000 shares are designated Series A Preferred Stock,

2,000 shares are designated Series B Preferred Stock, 500 shares are

designated Series C Preferred Stock, and 2,077,500 shares are not

designated. As of December 31, 2

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