8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest
event reported): August 31, 2000

HARRIS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	1-3863	34-0276860
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

1025 West NASA Blvd., Melbourne, FL	32919
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (321) 727-9100

No Change

(Former name or former address, if changed since last report.)

Item 1. Not Applicable.

Item 2. Acquisition or Disposition of Assets.

      On August 31, 2000, Harris Corporation, a Delaware corporation (“Harris” or the “Company”), acquired Wavtrace, Inc., a Washington corporation (“Wavtrace”). The acquisition was consummated through the merger (the “Merger”) of WT Acquisition Corp., a Washington corporation and wholly-owned subsidiary of Harris, with and into Wavtrace pursuant to the Agreement of Merger (the “Merger Agreement”), dated as of July 28, 2000, as amended. Wavtrace has survived the Merger as a wholly-owned Washington subsidiary of Harris, and has changed its name to “Harris Broadband Wireless Access, Inc.” The Merger occurred following approval by the shareholders of Wavtrace and the satisfaction of certain other closing conditions.

      Wavtrace is a Bellevue, Washington-based developer of broadband wireless access systems for high speed wireless access to the Internet and other data, voice, and video services. Wavtrace designs, manufactures and markets short-haul, point-to-multipoint, millimeter-wave radio systems for use in the worldwide wireless telecommunications market.

      Prior to the Merger, Harris owned approximately twenty percent (20%) of Wavtrace. Pursuant to the terms of Merger Agreement, Harris acquired the remaining shares of Wavtrace for approximately $134 million excluding cash acquired and including assumed debt and stock options, subject to adjustment. Pursuant to the Merger Agreement, Harris assumed certain options to purchase Wavtrace stock held by Wavtrace employees. As a result of this assumption, options to purchase approximately 216,000 Harris shares have been granted.

      Pursuant to an Indemnity and Escrow Agreement (“Escrow Agreement”) entered into in connection with the Merger, the former shareholders of Wavtrace have agreed to indemnify and hold Harris harmless from losses that Harris or its affiliates may suffer as a result of any breach of representation or warranty made by Wavtrace in the Merger Agreement and for certain other potential liabilities. Ten percent (10%) of the purchase price has been deposited into escrow to secure these indemnification obligations. Unless claims are made, one-half of the escrowed amount will be released eight months from the closing, with the remainder to be released fifteen months following the closing.

      The foregoing description of the terms of the transaction is qualified in its entirety by reference to (1) the Agreement of Merger, dated as of July 28, 2000, as amended by Amendment No. 1 to the Agreement of Merger, copies of which are attached as Exhibit 2.1, and (2) the Indemnity and Escrow Agreement, dated as of August 31, 2000, a copy of which is attached as Exhibit 2.2. The press release announcing the consummation of the transaction is attached as Exhibit 99.1, hereto, and is incorporated herein by reference.

Items 3-4. Not Applicable.

Item 5. Other Events.

      On October 22, 1999, Harris announced that its Board of Directors authorized the repurchase of up to 15,000,000 shares of its common stock periodically in the open-market, in negotiated or block transactions or pursuant to tender offers. During fiscal 2000, Harris repurchased approximately 10.7 million of its shares in open-market transactions.

      Harris continually evaluates repurchases in light of market conditions, available cash and other factors. Since the start of fiscal 2001 and through September 13, 2000, Harris has repurchased approximately 500,000 additional shares. The total number of outstanding shares of Harris common stock on September 13, 2000, was approximately 68,531,269.

2

			Page
Item 7. Financial Statements and Exhibits
	(a) Financial Statements of Business Acquired
		Wavtrace, Inc. Audited Financial Statements:
		(i) Report of Ernst & Young LLP, dated July 19, 2000		F-1
		(ii) Wavtrace, Inc. Balance Sheet as of December 31, 1999, and December 31, 1998		F-2
		(iii) Wavtrace, Inc. Statement of Operations for the years ended December 31, 1999, and December 31, 1998		F-3
		(iv) Wavtrace, Inc. Statement of Stockholders’ Equity for the years ended December 31, 1999, and December 31, 1998		F-4
		(v) Wavtrace, Inc. Statements of Cash Flows for the years ended December 31, 1999, and December 31, 1998		F-5
		(vi) Wavtrace, Inc. Notes to Financial Statements		F-6
		Wavtrace, Inc. Condensed Interim Financial Statements:
		(i) Wavtrace, Inc. Condensed Balance Sheets, as of June 30, 2000 (unaudited), and December 31, 1999		F-20
		(ii) Wavtrace, Inc. Condensed Statements of Operations (unaudited) for the six months ended June 30, 2000, and for the twelve months ended June 30, 2000		F-21
		(iii) Wavtrace, Inc. Condensed Statement of Cash Flows (unaudited) for the six months ended June 30, 2000		F-22
		(iv) Wavtrace, Inc. Notes to Condensed Financial Statements		F-23
	(b) Pro Forma Financial Information
		Pro Forma Condensed Consolidated Financial Statements (unaudited):
		(i) Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2000		F-25
		(ii) Unaudited Pro Forma Condensed Consolidated Statement of Income for the fiscal year ended June 30, 2000		F-26
		(iii) Notes to Unaudited Condensed Consolidated Financial Statements		F-27

3

      (c) Exhibits.

      The following documents are filed as Exhibits to this Report:

2.1	Agreement of Merger, dated as of July 28, 2000, among Harris Corporation, WT Acquisition Corp., Wavtrace, Inc., and Thomas T. van Overbeek (including the first amendment thereto).
2.2	Indemnification and Escrow Agreement, dated as of August 31, 2000, among Harris Corporation, Wavtrace, Inc., Thomas T. van Overbeek, and Citibank, N.A.
23.1	Consent of Ernst & Young LLP, independent accountants.
99.1	Press Release, dated August 31, 2000, announcing that Harris has completed the previously announced purchase of Wavtrace, Inc.

Items 8-9. Not Applicable.

4

(a) Financial Statements of Business Acquired

Report of Independent Auditors

To the Board of Directors and Stockholders of
   Wavtrace, Inc.

We have audited the accompanying balance sheets of Wavtrace, Inc. (the Company) as of December 31, 1999 and 1998, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wavtrace, Inc. at December 31, 1999, and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations raise substantial doubt about its ability to continue as a going concern. The 1999 financial statements do not include any adjustments that might result from the outcome of this uncertainty.

July 19, 2000	Ernst & Young LLP
Seattle, Washington

F-1

Wavtrace, Inc.
Balance Sheets

			December 31
			1999			1998
Assets
Current assets:
	Cash and cash equivalents		$	6,727,820		$	3,859,511
	Securities available for sale			3,014,551			—
	Accounts receivable			122,811			—
	Inventories			1,203,705			11,774
	Prepaid expenses and other current assets			456,663			113,511
Total current assets				11,525,550			3,984,796
Fixed assets, net				4,304,714			3,258,962
Deferred charges				140,902			110,952
Other assets				159,561			85,963
Total assets			$	16,130,727		$	7,440,673
Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable		$	1,736,836		$	869,423
	Accrued liabilities			484,647			446,673
	Customer deposits			376,211
	Current portion of obligations under capital leases			834,250			541,895
	Current portion of long-term debt			2,561,151			1,683,085
Total current liabilities				5,993,095			3,541,076
Obligations under capital leases, less current portion				1,844,759			1,725,807
Long-term debt, less current portion				772,537			1,925,119
Stockholders’ equity:
	Convertible and redeemable preferred stock, $0.001 par value:
		Authorized shares — 41,000,000
		Liquidation value — $46,309,824 at December 31, 1999
		Series A — 4,686,666 shares issued and outstanding		7,180,777			7,180,777
		Series B — 4,014,668 shares issued and outstanding		15,033,988			15,033,988
		Series C — 26,916,467 shares issued and outstanding		23,789,621			—
	Common stock, $0.001 par value:
		Authorized shares — 60,000,000
		Issued and outstanding shares — 4,752,109 and 2,777,694 at December 31, 1999 and 1998, respectively		1,482,720			765,199
Stock notes receivable				(293,992	)		(162,305	)
Accumulated deficit				(39,672,778	)		(22,568,988	)
Total stockholders’ equity				7,520,336			248,671
Total liabilities and stockholders’ equity			$	16,130,727		$	7,440,673

      See accompanying notes.

F-2

Wavtrace, Inc.
Statements of Operations

		Year Ended December 31
		1999			1998
Operating Expenses:
	Research and development	$	12,174,912		$	11,436,553
	Sales and marketing		1,361,892			889,292
	General and administrative		1,248,062			1,580,392
	Depreciation		1,295,331			786,167
Total operating expenses			16,080,197			14,692,404
Operating loss			16,080,197			14,692,404
Investment income			(458,161	)		(289,333	)
Interest expense			1,481,754			802,353
Net loss		$	17,103,790		$	15,205,424

See accompanying notes.

F-3

Wavtrace, Inc.
Statement of Stockholders’ Equity

		Convertible and Redeemable Preferred Stock
		Series A				Series B				Series C
		Shares		Amount		Shares		Amount		Shares		Amount
Balance at January 1, 1998			4,686,666	$	6,986,492		—	$	—		—	$	—
	Exercise of stock options in exchange for cash and note receivable		—		—		—		—		—		—
	Sale of Series B Preferred Stock, net of issuance costs of $43,851		—		—		4,014,668		15,011,154		—		—
	Common stock acquired by the Company’s cancellation of note receivable		—		—		—		—		—		—
	Warrants issued in connection with debt		—		194,285		—		22,834		—		—
	Repayment of notes receivable		—		—		—		—		—		—
	Stock compensation related to employee severance agreement		—		—		—		—		—		—
	Net loss		—		—		—		—		—		—
Balance at December 31, 1998			4,686,666		7,180,777		4,014,668		15,033,988		—		—
	Exercise of stock options in exchange for cash and note receivable		—		—		—		—		—		—
	Sale of Series C Preferred Stock, net of issuance costs of $550,000		—		—		—		—		26,916,467		23,674,820
	Common stock acquired by the Company’s cancellation of note receivable		—		—		—		—		—		—
	Repayment of notes receivable		—		—		—		—		—		—
	Warrants issued in connection with debt		—		—		—		—		—		114,801
	Warrants exercised in connection with debt		—		—		—		—		—		—
	Net loss		—		—		—		—		—		—
Balance at December 31, 1999			4,686,666	$	7,180,777		4,014,668	$	15,033,988		26,917,467	$	23,789,621

[Additional columns below]

[Continued from above table, first column repeated]

		Common Stock						Stock
								Notes			Accumulated
		Shares			Amount			Receivable			Deficit			Total
Balance at January 1, 1998			2,308,999		$	671,350		$	(125,850	)	$	(7,363,564	)	$	168,428
	Exercise of stock options in exchange for cash and note receivable		690,115			104,236			(75,262	)		—			28,974
	Sale of Series B Preferred Stock, net of issuance costs of $43,851		—			—			—			—			15,011,154
	Common stock acquired by the Company’s cancellation of note receivable		(221,420	)		(33,213	)		33,213			—			0
	Warrants issued in connection with debt		—			—			—			—			217,119
	Repayment of notes receivable		—			—			5,594			—			5,594
	Stock compensation related to employee severance agreement		—			22,826			—			—			22,826
	Net loss		—			—			—			(15,205,424	)		(15,205,424	)
Balance at December 31, 1998			2,777,694			765,199			(162,305	)		(22,568,988	)		248,671
	Exercise of stock options in exchange for cash and note receivable		693,131			166,891			(152,500	)		—			14,391
	Sale of Series C Preferred Stock, net of issuance costs of $550,000		—			—			—			—			23,674,820
	Common stock acquired by the Company’s cancellation of note receivable		(95,000	)		(14,250	)		14,250			—			0
	Repayment of notes receivable		—			—			6,563			—			6,563
	Warrants issued in connection with debt		—			551,765			—			—			666,566
	Warrants exercised in connection with debt		1,376,284			13,115			—			—			13,115
	Net loss		—			—			—			(17,103,790	)		(17,103,790	)
Balance at December 31, 1999			4,752,109		$	1,482,720		$	(293,992	)	$	(39,672,778	)	$	7,520,336

      See accompanying notes.

F-4

Wavtrace, Inc.
Statements of Cash Flows

			Year Ended December 31
			1999			1998
Operating activities
Net loss			$	(17,103,790	)	$	(15,205,424	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			1,295,330			786,167
	Noncash stock compensation expense			—			22,826
	Noncash interest expense			636,615			219,741
	Other operating activities			3,381			—
	Changes in assets and liabilities:
		Increase in accounts receivable		(122,811	)		—
		Increase in inventories		(1,191,931	)		—
		Increase in prepaid expenses and other assets		(416,750	)		(104,975	)
		Increase in accounts payable and accrued liabilities		905,387			635,756
		Increase in deferred revenue		376,211			—
Net cash used in operating activities				(15,618,358	)		(13,645,909	)
Investing activities
Purchases of securities available for sale				(3,014,551	)		—
Purchases of fixed assets				(1,338,215	)		(649,529	)
Other investing activities				1,500			—
Net cash used in investing activities				(4,351,266	)		(649,529	)
Financing activities
Proceeds from repayment of stock notes				6,563			5,594
Principal payments under capital lease obligations				(596,442	)		(220,284	)
Principal payments on borrowings				(2,367,307	)		(1,584,869	)
Proceeds from borrowings				7,061,682			4,047,240
Proceeds from exercise of stock options and warrants				27,506			28,974
Proceeds from issuance of convertible and redeemable preferred stock, net of issuance costs				18,705,931			15,011,154
Net cash provided by financing activities				22,837,933			17,287,809
Net increase in cash and cash equivalents				2,868,309			2,992,371
Cash and cash equivalents, beginning of year				3,859,511			867,140
Cash and cash equivalents, end of year			$	6,727,820		$	3,859,511
Noncash transactions and supplemental disclosures
Cash paid for interest			$	831,190		$	565,467
Fixed assets acquired through capital leases			$	1,007,748		$	1,485,519
Purchase of common stock upon cancellation of note receivable			$	14,250		$	33,213
Common stock issued in exchange for stock note			$	152,500		$	75,261
Conversion of note to preferred stock			$	4,968,890		$	—
Instruments in connection with debt warrants			$	636,615		$	219,741

      See accompanying notes.

F-5

Wavtrace, Inc.
Notes to Financial Statements
December 31, 1999

1. Description of the Company and Liquidity

Description of the Company

Wavtrace, Inc. (the Company) designs, manufactures and markets short-haul, point-to-multipoint, millimeter-wave radio systems for use in the worldwide wireless telecommunications market. Network operators will use the Company’s systems to provide last-link broadband access to business end users. The integrated architecture and high software content of the Company’s systems are designed to offer cost effective, high performance systems with built-in agility to operate at frequencies ranging from 13 to 42 GHz.

Liquidity

At December 31, 1999, the Company had cash of $6,727,820 and securities available for sale of $3,014,551 available to fund operations. For the year ended December 31, 1999, the Company recorded a net loss of $17,103,790 and an accumulated deficit of $39,672,778. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Since inception, the Company has financed its operations and capital expenditures mainly through sales of common stock, and convertible and redeemable preferred stock. The Company’s business will require additional equity or debt financing to continue operations. Currently, the Company plans to obtain equity funding during the third quarter of fiscal year 2000.

Management believes that proceeds from the loans and/or a private equity investor will provide the Company with the necessary cash proceeds to allow the Company to have the wherewithal to continue operations through at least December 31, 2000. The Company’s continuation as a going concern is dependent upon management’s ability to successfully negotiate an agreement with equity investors and/or obtain debt financing.

F-6

Wavtrace, Inc.
Notes to Financial Statements (continued)

2. Accounting Policies

Revenue Recognition

Revenues from product sales are generally recognized when all of the following conditions are met: the product has been shipped, an arrangement exists with the customer and the Company has the right to invoice the customer, collection of the receivable is probable, and the Company has fulfilled all of its material contractual obligations to the customer. Provisions are made at the time of revenue recognition for estimated warranty costs.

Cash and Cash Equivalents

All short-term investments purchased with maturities of three months or less are considered to be cash equivalents.

Securities Available for Sale

All available-for-sale securities are carried at fair value. Unrealized gains and losses on these securities are immaterial. All securities held by the company mature within one year of the purchase date.

Fixed Assets

Fixed assets are stated at cost. Depreciation, including amortization of equipment under capital leases, is provided using the straight-line method over the estimated useful lives of the assets (generally three to seven years), or the life of the applicable capital lease, whichever is shorter.

Income Taxes

The Company accounts for income taxes in accordance with the liability method, which requires that deferred income taxes be provided based on the estimated future tax effects of differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized a valuation allowance equal to the deferred tax assets due to the uncertainty of realizing the benefit of the assets.

F-7

Wavtrace, Inc.
Notes to Financial Statements (continued)

2. Accounting Policies (continued)

Stock-Based Compensation

The Company has elected to follow the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options rather than the alternative fair value accounting method, as provided under Financial Accounting Standards Board Statement No. 123 (FASB 123), Accounting for Stock-Based Compensation. Under APB 25, because the exercise price of the Company’s employee stock options granted is the fair market value of the underlying stock on the date of grant, no compensation expense is recognized.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the 1998 financial statements have been classified to conform to the current year presentation.

New Accounting Pronouncement

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101). This summarized certain areas of the staff’s views in applying generally accepted accounting principles as it applies to revenue recognition. The Company believes that its revenue recognition principles comply with SAB 101. The Company will continue to evaluate interpretations of SAB 101.

F-8

Wavtrace, Inc.
Notes to Financial Statements (continued)

3. Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade account receivables, cash equivalents and short-term investments. On December 31, 1999, all of the Company’s trade accounts receivable balance was from one customer. With respect to cash equivalents and short-term investments, the Company has investment policies that limit the amount invested in any one investment and restrict investments to those evaluated as investment grade.

4. Inventories

Inventories are stated at the lower of cost or market on a first-in, first-out basis. Inventories consist of the following at December 31:

	1999		1998
Raw materials	$	972,802	$	11,774
Finished goods		230,903		—
	$	1,203,705	$	11,774

5. Fixed Assets

Fixed assets consist of the following at December 31:

	1999		1998
Computer equipment and software	$	5,688,851	$	3,870,371
Office equipment and furniture		675,274		518,623
Manufacturing equipment		257,140		—
Leasehold improvements		105,778		—
		6,727,043		4,388,994
Less accumulated depreciation		2,422,329		1,130,032
	$	4,304,714	$	3,258,962

At December 31, 1999 and 1998, furniture, computer, office, and test equipment include assets acquired pursuant to capital leases with an original cost of $3,380,565 and $2,381,316 and a net book value of $2,347,884 and $1,916,958, respectively.

F-9

Wavtrace, Inc.
Notes to Financial Statements (continued)

6. Lease Commitments

The Company leases computers and other equipment under capital leases with terms of three to five years. During 1999, the Company entered into a $3.0 million master lease agreement with a financial institution. The utilization of the master lease commitment expires July 31, 2000. As of year-end, the Company utilized $913,038 of the master lease commitment. In connection with the master lease agreement and a related equipment financing agreement (EFA) (see note 6), the Company issued warrants entitling the holder to purchase 173,333 shares of Series C preferred stock (Series C) at an exercise price of $0.90 per share. The warrants (valued at $81,467) expire at the earliest of 10 years, the sale of the Company, or the effective date of an initial public offering. The value of the warrants is being amortized over the lease term.

The Company has a $2.18 million master lease agreement with a financial institution. In connection with the lease agreement, the Company issued 82,333 warrants in 1997, entitling the holder to purchase shares of Series A Preferred Stock (Series A) at an exercise price of $1.50 per share. The warrants, for which the value was not material, expire at the latter of seven years, or three years after the effective date of an initial public offering, but in no case shall exceed ten years.

Minimum future lease payments under capital leases are as follows:

Year ending December 31
2000	$	1,156,429
2001		1,079,494
2002		813,700
2003		219,699
Total minimum payments		3,269,322
Less interest		(590,313	)
Present value of minimum lease payments		2,679,009
Less current portion		(834,250	)
	$	1,844,759

F-10

Wavtrace, Inc.
Notes to Financial Statements (continued)

6. Lease Commitments (continued)

The Company also has non-cancelable operating equipment leases with original terms of three to five years, and building leases of one to five years, with additional one-year lease options. Minimum future lease payments under operating leases are as follows:

Year Ending December 31
2000	$	538,727
2001		459,957
2002		227,451
2003		233,076
2004		238,875
Thereafter		60,084
	$	1,758,170

F-11

Wavtrace, Inc.
Notes to Financial Statements (continued)

7. Debt

      Long-term debt consists of the following:

	December 31
	1999			1998
1997 Term Loan, monthly principal payment of $34,722, plus interest at prime plus 1.75% (10.0% at December 31, 1999), maturing in 2000	$	308,803		$	725,470
1998 Term Loan, repaid September 11, 1999		—			547,240
1999 Term Loan, payable interest only until the earlier of November 11, 2000 or the facility is fully drawn, principal payable thereafter over 36 months at prime plus 1.5% (10.0% at December 31, 1999), maturing in 2003		861,961			—
Equipment financing agreement, monthly payments of $27,419 based on a payment factor rate of 3.084% over 36 months, maturing in 2002		816,070			—
Subordinated debt, monthly principal payment of $89,286, plus interest at an effective rate of 15.2%, maturing in 2001		1,346,854			2,335,494
		3,333,688			3,608,204
Less current portion		(2,561,151	)		(1,683,085	)
	$	772,537		$	1,925,119

During 1999, the Company entered into an agreement with a financial institution with regard to two credit facilities: a $1.5 million line of credit (Line of Credit) expiring November 17, 2000, with a stated interest rate of prime plus 1.0%; and a $2.5 million term loan (1999 Term Loan) with a stated interest rate of prime plus 1.5%. The 1999 Term Loan and 1997 Term Loan are held by the same bank and debt is secured by substantially all of the Company’s assets. At December 31, 1999, $1,638,039 additional borrowing was available on the 1999 Term Loan to finance fixed asset acquisitions, and the Company has not drawn upon the $1.5 million Line of Credit. In connection with the Line of Credit and the 1999 Term Loan, the Company issued warrants (valued at $33,334) entitling the holder to purchase 66,667 shares of Series C at an exercise price of $0.90 per share.

F-12

Wavtrace, Inc.
Notes to Financial Statements (continued)

7. Debt (continued)

The value of the warrants is being amortized over the life of the loan. The warrants expire at the latter of seven years or three years after the effective date of an initial public offering, but in no case shall exceed ten years.

In connection with the 1997 Term Loan, the Company issued warrants (the value of which were immaterial) entitling the holder to purchase 26,667 shares of Series A at an exercise price of $1.50 per share. In connection with the 1998 Term Loan, the Company issued 16,667 warrants (valued at $22,834) entitling the holder to purchase shares of Series B preferred stock (Series B) at an exercise price of $3.75 per share.

During 1999, the Company borrowed $900,000 under an equipment financing agreement (EFA). The Company makes monthly payments of $27,419 over 36 months using a payment factor rate of 3.084%. The EFA matures in 2002. In connection with EFA and the master lease agreement (See Note 5) , the Company issued 173,333 warrants, entitling the holder to purchase shares of Series C Preferred Stock at an exercise price of $0.90 per share. The warrants (valued at $81,467) expire at the earliest to occur of ten years, the sale of the Company, or the effective date of an initial public offering.

In 1998, the Company entered into a $2.5 million subordinated term debt agreement with a financial institution. The debt bears interest at 14.75% during the first 12 months, 15.75% thereafter, and matures on April 1, 2001. This subordinated debt is secured by a secondary lien against the assets of the Company. As part of the agreement, the Company issued warrants (valued at $194,285) entitling the holder to purchase 190,476 shares of Series A at an exercise price of $2.25 per share. The warrants expire the latter of seven years or three years after the effective date of an initial public offering, but in no case shall exceed ten years. The value of the warrants is being amortized over the loan term.

The Company paid $799,305 and $460,945 for interest on its debt agreements during 1999 and 1998, respectively.

The term loan agreements with a bank contain various covenants. Currently, the Company is in violation of a non-financial requirement (i.e., issuance of audited financial statements within 90 days after December 31, 1999) in the debt covenants. Consequently, a portion of debt is recallable by the lender. Therefore, this amount ($861,961) has been classified as current.

F-13

Wavtrace, Inc.
Notes to Financial Statements (continued)

8. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The Company has net operating loss and tax credit carryforwards of $37.6 million and $1,246,000, respectively, which begin to expire in 2011. Since the Company’s utilization of these deferred tax assets is dependent on future profits, which are not assured, a valuation allowance for deferred tax assets was provided in 1999 and 1998. Under current tax law, the use of net operating loss and tax credit carryforwards are limited based on significant changes in ownership.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

		December 31
		1999			1998
Deferred tax assets:
	Net operating loss carryforwards	$	12,795,000		$	7,088,000
	Research and development tax credit		1,246,000			735,000
	Financial statement expenses in excess of tax		103,000			89,000
			14,144,000			7,912,000
Less valuation allowance			(14,144,000	)		(7,912,000	)
Net deferred tax assets		$	0		$	0

The valuation reserve increased $6,232,000 and $5,586,000 during 1999 and 1998, respectively, commensurate primarily with the increase in the net operating loss carryforwards.

F-14

Wavtrace, Inc.
Notes to Financial Statements (continued)

9. Stockholders’ Equity

Preferred Stock

The Company has authorized 41,000,000 shares of convertible and redeemable preferred stock, of which 4,044,668 shares have been designated as Series A, 4,986,142 shares have been designated as Series B, and 31,969,190 shares have been designated as Series C (collectively the three classes of preferred stock are referred to as Preferred Stock).

Each share of Preferred Stock is convertible into shares of common stock at the stockholder’s option, at various rates, subject to antidilution provisions and any accrued but unpaid dividends. At December 31, 1999, each share of Series A was convertible into 1.27 shares of common stock, each share of Series B was convertible into 2.22 shares of common stock, and each share of Series C was convertible into 1.00 shares of common stock. Unissued shares of common stock are reserved for issuance in the event of full conversion of all convertible and redeemable Preferred Stock. Subject to certain conditions, convertible and redeemable Preferred Stock also has mandatory conversion requirements in the event of a qualified initial public offering of the Company’s common stock, as specified in the Company’s Articles of Incorporation.

Each share of Preferred Stock has voting rights determined on an as-if-converted basis. The Preferred Stock also has preferential rights, in the event of any distribution of assets upon liquidation of the Company. At December 31, 1999, the per-share liquidation preference for Series A, Series B, and Series C was $1.50, $3.75, and $0.90, respectively, plus any accrued but unpaid dividends. The Preferred Stock has redemption rights on or after May 31, 2003, that may require the Company to redeem its stock at the original purchase price, plus declared but unpaid dividends.

The Company and the holders of the common and Preferred Stock entered into a stockholder agreement which specifies restrictions on transfer, covenants, co-sale provisions, and rights of first offer with regard to sales of securities by the Company. In addition, the Company and the stockholders entered into a registration rights agreement for a five-year period ending in 2004.

In February 1999, the Company issued approximately $5.0 million in convertible notes to several of its Preferred Stock investors. In connection with the issuance of the convertible notes, the Company issued warrants to purchase approximately 1.5 million shares of common stock at $.01 per share. Approximately 1.4 million of the warrants were exercised in 1999. The remaining warrants expire in February 2004. The warrants were valued at $552,000. The notes converted into Series C Preferred Stock in June 1999. The value of the warrants was included in 1999 interest expense.

F-15

Wavtrace, Inc.
Notes to Financial Statements (continued)

9. Stockholders’ Equity (continued)

On June 30, 1999, the Company issued a warrant to a customer to purchase approximately 3.1 million shares of Series C in connection with a supply agreement. The warrant is exercisable based on meeting minimum purchase volumes, which increase annually. The initial exercise price of the warrant is $1.35 per share, which increases annually. The ultimate value of the warrant will be determined upon satisfaction of the performance criteria. The warrant expires upon the earlier of June 2002 or the sale of the Company. At December 31, 1999, no warrants have vested.

Stock Option Plan

During the year, the Company’s Board approved the 1999 Stock Option Plan (the 1999 Plan), which provides for the granting of incentive and nonqualified stock options to acquire 10,161,986 shares of common stock under the 1999 Plan. The Company’s 1995 Stock Option Plan (the 1995 Plan), provided for the granting of incentive and nonqualified stock options to acquire 3,204,647 shares of common stock, all of which have been issued. It is not anticipated that any additional shares will be granted under the 1995 Plan. Options under the 1999 Plan and the 1995 Plan are either incentive stock options, granted at prices equal to the fair market value of common shares at the date of grant, or nonqualified options granted at exercise prices determined by the Board. Options generally vest ratably over a four-year period and expire ten years after the date of grant. During the year ended December 31, 1998, the Company recognized $22,826 in compensation expense for stock options, which vested after the date of service.

F-16

Wavtrace, Inc.
Notes to Financial Statements (continued)

9. Stockholders’ Equity (continued)

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over each option’s vesting period. The Company’s pro forma information follows:

	1999		1998
Pro forma net loss	$	17,257,238	$	15,238,799

A summary of the activity under the 1995 and 1999 Plans is as follows:

							Weighted-
							Average
							Exercise
				Shares			Price
Balance at January 1, 1998					1,720,420			0.15
			Granted		949,323			0.33
			Exercised		(690,115	)		0.15
			Cancelled		(305,463	)		0.26
	Balance at December 31, 1998				1,674,165			0.24
			Granted		9,625,563			0.27
			Exercised		(693,131	)		0.24
			Cancelled		(138,290	)		0.29
		Balance at December 31, 1999			10,468,307			0.27

						Weighted-
						Average				Weighted-
				Weighted-		Remaining				Average
Range of				Average		Contractual		Options		Exercise
Exercise		Outstanding		Exercise		Life		Exercisable at		Price
Prices		Options		Price Outstanding		(Years)		December 31, 1999		Exercisable
$	0.15		950,564	$	0.15		7.42		542,658	$	0.15
	0.25		7,495,113		0.25		9.56		813,358		0.25
	0.38		2,022,630		0.38		9.09		660,055		0.38
	Total		10,468,307		0.27		9.28		2,016,071		0.27

F-17

Wavtrace, Inc.
Notes to Financial Statements (continued)

9. Stockholders’ Equity (continued)

At December 31, 1999 and 1998, 2,016,071 and 295,380 options were exercisable, respectively. At December 31, 1999 and 1998, 616,081 and 129,887 options were available for grant, respectively. At December 31, 1999, the weighted-average remaining contractual life of outstanding options was 9.28 years.

	1999			1998
Weighted-average fair value of options granted during the year	$	0.0499	$		0.0688

Pro forma information regarding net income is required by FASB 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the minimum value option pricing model with the following weighted-average assumptions for 1999 and 1998: risk-free interest rate of 6%; dividend yield of 0%; and a weighted-average expected life of the option of four years.

Common Stock Reserved

At December 31, 1999, common stock was reserved for the following purposes:

Preferred stock warrants convertible to common stock	3,746,102
Common stock warrants convertible to common stock	112,632
Stock option plan	11,084,388
Conversion of preferred stock	41,782,380
	56,725,502

Stock Repurchase Agreements

During 1997, 1998, and 1999, the Company sold shares of common stock to a founder, executive management, and key employees under agreements that allow the Company, at its option, to repurchase the shares at the original purchase price if the employment or consulting relationship with the Company ceases for any reason. Under the repurchase agreements, the shares subject to repurchase are generally reduced in cumulative pro rata increments over a four-year period beginning at the issuance date. As of December 31, 1999, 685,020 shares continued to be subject to repurchase. During 1999 and 1998, the Company repurchased 95,000 and 221,420 shares, respectively, of common stock according to these agreements.

F-18

Wavtrace, Inc.
Notes to Financial Statements (continued)

10. Related-Party Transactions

The Company issued common shares in exchange for full recourse notes from Board members, executive management, and certain key employees, The notes accrued interest at 5.68% and were converted to Series C preferred stock in June 1999. See Note 8 Stockholders Equity.

11. Subsequent Event

In June 2000, the Company received approximately $5 million from existing investors in exchange for convertible notes to existing investors. In connection with the issuance of the convertible notes, the Company issued warrants to purchase approximately 1.1 million shares of Series C Preferred Stock at $0.90 per share. The value of the warrants will be recognized as interest expense over the life of the notes.

F-19

Wavtrace, Inc.
Condensed Balance Sheets
(In thousands)

		As Of
		June 30,			December 31,
		2000			1999
		(Unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	3,571		$	6,728
	Securities available for sale		—			3,014
	Accounts receivable		40			123
	Inventories		—			1,204
	Prepaid expenses and other current assets		289			456
Total current assets			3,900			11,526
Fixed assets, net			5,186			4,305
Other assets			492			300
Total assets		$	9,578		$	16,131
Liabilities and stockholders’ equity
Current liabilities:
	Accounts payable	$	1,451		$	1,737
	Accrued liabilities		1,558			485
	Customer deposits		—			376
	Bridge note		5,024			—
	Current portion of obligations under capital leases		1,000			834
	Current portion of long-term debt		1,672			2,561
Total current liabilities			10,706			5,993
Obligations under capital leases, less current portion			1,716			1,845
Long-term debt, less current portion			1,441			773
Total stockholders’ equity			(4,285	)		7,520
Total liabilities and stockholders’ equity		$	9,578		$	16,131

      See accompanying notes.

F-20

Wavtrace, Inc.
Condensed Statements of Operations
(Unaudited)
(In thousands)

		Six Months Ended			Twelve Months Ended
		June 30, 2000			June 30, 2000
Sales		$	449		$	449
Cost of goods sold			3,964			3,964
Operating Expenses:
	Research and development		5,697			12,183
	Sales and marketing		1,021			1,785
	General and administrative		839			1,506
	Depreciation		676			1,396
Total operating expenses			8,233			16,870
Operating (loss)			(11,748	)		(20,385	)
Interest expense – net			(386	)		(431	)
Net (loss)		$	(12,134	)	$	(20,816	)

      See accompanying notes.

F-21

Wavtrace, Inc.
Condensed Statement of Cash Flows
(Unaudited)
(In thousands)

			Six Months Ended
			June 30,
			2000
Operating activities
Net loss			$	(12,134	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			676
	Changes in assets and liabilities:
		Decrease in accounts receivable		83
		Decrease in inventories		1,204
		Increase in prepaid expenses and other assets		(25	)
		Increase in accounts payable and accrued liabilities		787
		Decrease in deferred revenue		(376	)
Net cash used in operating activities				(9,785	)
Investing activities
Sales of securities available for sale				3,015
Purchases of fixed assets				(1,557	)
Net cash used in investing activities				1,458
Financing activities
Increase in short-term debt				4,301
Increase in long-term debt				540
Proceeds from exercise of stock options and warrants				329
Net cash provided by financing activities				5,170
Net increase in cash and cash equivalents				(3,157	)
Cash and cash equivalents as of December 31, 1999				6,728
Cash and cash equivalents as of June 30, 2000			$	3,571

      See accompanying notes.

F-22

Wavtrace, Inc.
Notes to Condensed Financial Statements
For the Six Months Ended June 30, 2000
(Unaudited)

Note A – Organization and Basis of Presentation

Wavtrace, Inc. (“Wavtrace”) is a privately-held U.S.-based company. Wavtrace’s principal activities include the design, manufacture and marketing of short-haul, point-to-multipoint, millimeter-wave radio systems for use in worldwide wireless telecommunications market.

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. In the opinion of management such financials reflect all adjustments necessary for a fair presentation of financial position, results of operations, and cash flows for such period. For further information refer to the financial statements and notes to financial statements included elsewhere in this Form 8-K dated August 31, 2000. Interim results are not necessarily indicative of results for a full year.

Note B – Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires an entity to recognize that all derivatives are either assets or liabilities in the balance sheet and measure those investments at fair value. Implementation of this standard has been delayed by the FASB for a twelve-month period. Wavtrace will be required to adopt SFAS 133 in the first quarter of 2001. At this time, management does not believe that SFAS 133 will have a material effect on Wavtrace’s results of operations or financial position.

In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” SAB 101 summarizes the SEC’s views in applying generally accepted accounting principles to revenue recognition in financial statements. Wavtrace is required to adopt SAB 101 in the fourth quarter of 2000. Management does not believe the adoption of SAB 101 will have a material effect on Wavtrace’s results of operations or financial position.

F-23

(b) PRO FORMA FINANCIAL INFORMATION

Harris Corporation’s (“Harris”) acquisition of Wavtrace, Inc. (“Wavtrace”) will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The estimated fair values included herein are based on preliminary estimates and may not be indicative of the final allocation of purchase price consideration. Amounts allocable to in-process research and development are estimated as $73.5 million and will be recorded as a one-time charge during the first quarter of fiscal 2001. The amount of goodwill reflected in the Unaudited Pro Forma Condensed Consolidated Balance Sheet and the related amortization expense reflected in the Unaudited Pro Forma Condensed Consolidated Statement of Income assumes that the write-off of purchased in-process research and development is $73.5 million. Prior to this acquisition, Harris owned approximately twenty percent (20%) of Wavtrace. The purchase price for the remaining approximately eighty (80%) is valued at $133.9 million, which includes $128.7 million of consideration paid at closing to former Wavtrace shareholders and for acquisition costs, $1.4 million for unvested Wavtrace options converted to Harris options, $9.6 million of debt assumed and excluding $5.8 million of acquired cash. This price is subject to adjustment based on terms of the Agreement of Merger, dated as of July 28, 2000 as amended. The amount of the consideration issued to the former shareholders and option holders of Wavtrace was determined by arm’s-length negotiation between the parties.

The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2000 gives effect to the acquisition of Wavtrace as if it had occurred June 30, 2000. Also, the Unaudited Pro Forma Condensed Consolidated Statement of Income for the fiscal year ended June 30, 2000 (“Pro Forma Financial Statements”) give effect to the acquisition of Wavtrace as if it occurred on July 3, 1999. The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2000; the Unaudited Pro Forma Condensed Consolidated Statement of Income for the fiscal year ended June 30, 2000; and the accompanying notes (“Pro Forma Financial Information”) should be read in conjunction with and are qualified by the historical financial statements and notes thereto of Wavtrace and Harris.

The Pro Forma Financial Information is intended for information purposes only and is not necessarily indicative of the combined results that would have occurred had the acquisition taken place July 3, 1999, nor is it necessarily indicative of results that may occur in the future.

F-24

HARRIS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000

(In millions)			Harris			Wavtrace,			Pro Forma
			Corporation			Inc.			Adjustments			Pro Forma
Assets
Current Assets
	Cash and cash equivalents		$	378.2		$	3.6		$	(126.5)	(a)	$	255.4
	Marketable securities			432.5			—			—			432.5
	Receivables			466.5			—			—			466.5
	Unbilled costs and accrued earnings on fixed price contracts			154.6			—			—			154.6
	Inventories			197.2			—			—			197.2
	Deferred income taxes			—			—			9.0	(b)		9.0
		Total current assets	$	1,629.0		$	3.6		$	(117.5	)		1,515.2
Plant and equipment				295.4			5.2			—			300.6
Intangibles resulting from acquisitions				166.2			—			45.2	(c)		213.3
Other assets				236.3			0.8			(11.3)	(d)		225.8
			$	2,326.9		$	9.6		$	(81.6	)	$	2,254.9
Liabilities and Shareholders’ Equity
Current Liabilities
	Short-term debt		$	75.6		$	5.0		$	(1.3)	(d)	$	79.3
	Accounts payable			109.5			1.4			—			110.9
	Other accrued items			234.3			1.6			—			235.9
	Advance payments and unearned income			73.7			—			—			73.7
	Income taxes			15.5			—			—			15.5
	Deferred income taxes			14.5			—			(14.5	)(b)		—
	Current portion of long-term debt			32.8			2.7			—			35.5
		Total current liabilities		555.9			10.7			(15.8	)		550.8
Non-current deferred income taxes				14.1			—			—			14.1
Long-term debt				382.6			3.2			—			385.8
Shareholders’ Equity
Preferred Stock				—			—			—			—
	Common Stock			69.0			—			—			69.0
	Other capital			228.4			—			5.8	(e)		234.2
	Retained earnings			864.1			—			(73.5	)(f)		792.6
	Unearned compensation			(3.2	)		—			(4.4	)(e)		(7.6	)
	Accumulated other comprehensive income (loss)			216.0			—			—			216.0
	Wavtrace’s total shareholders’ equity			—			(4.3	)		4.3	(g)		—
		Total Shareholders’ Equity		1,374.3			(4.3	)		(65.8	)		1,304.2
			$	2,326.9		$	9.6		$	(83.6	)	$	2,254.9

      See notes to unaudited pro forma condensed consolidated financial statements.

F-25

HARRIS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED JUNE 30, 2000

(In millions except per share amounts)			Harris			Wavtrace,			Pro Forma
			Corporation			Inc.			Adjustments			Pro Forma
Revenue from product sales and services			$	1,807.4		$	0.5		$	—		$	1,807.9
Costs and Expenses
	Cost of product sales and services			1,352.6			4.0			—			1,356.6
	Engineering, selling and administrative expenses			404.5			16.9			—			421.4
	Amortization of goodwill and purchased intangible assets			10.5			—			5.8	(h)		16.3
	Restructuring expenses			41.0			—			—			41.0
	Purchased in-process research and development			10.7			—			—			10.7
	Other income			(48.2	)		—			—			(48.2	)
				1,771.1			20.9			5.8			1,797.8
Operating income (loss)				36.3			(20.4	)		(5.8	)		10.1
Interest income				27.4			—			(7.9	)(i)		19.5
Interest expense				(25.2	)		(0.4	)		—			(25.6	)
Income from continuing operations before taxes				38.5			(20.8	)		(13.7	)		4.0
Income taxes				13.5			—			(2.8)	(j)		10.7
Income from continuing operations				25.0			(20.8	)		(10.9	)		(6.7	)
Discontinued operations net of income taxes				(7.0	)		—			—			(7.0	)
Net income (loss)			$	18.0		$	(20.8	)	$	(10.9	)	$	(13.7	)
Net income per share:
	Basic
		Continuing operations	$	0.34								$	(0.09	)
		Discontinued operations		(0.09	)								(0.09	)
			$	0.25								$	(0.18	)
	Diluted
		Continuing operations	$	0.34								$	(0.09	)
		Discontinued operations		(0.09	)								(0.09	)
			$	0.25								$	(0.18	)
Average shares outstanding:
	Basic			73.2						—			73.2
	Diluted			73.4						(0.2	)(k)		73.2

      See notes to unaudited pro forma condensed consolidated financial statements.

F-26

HARRIS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(a)	Reflects cash paid to selling shareholders and for other costs associated with the acquisition ($128.7 million) less $2.2 million cash received by Wavtrace prior to the acquisition as a result of the exercise by employees of vested stock options.
(b)	To record the deferred tax asset related to Wavtrace’s net operating loss carryforward of $23.5 million. Harris would have a deferred tax asset of $9.0 million post adjustment, which is net of Harris’ unadjusted deferred tax liability of $14.5 million.
(c)	To allocate the purchase price, including transaction costs incurred in the acquisition, Harris’ original $10.0 million investment, and the portion of the exchanged unvested options that is included in the purchase price. The excess of the purchase price over the fair value of the net assets and other intangible assets acquired is reflected as goodwill ($43.9 million) and other intangible assets including assembled work force ($1.3 million). The goodwill and other intangible assets including assembled work force are amortized using the straight-line method over periods ranging from 4 to 8 years. The estimated fair values of assets acquired and liabilities assumed are based upon preliminary estimates and may not be indicative of the final allocation of purchase price consideration. Any variation from these estimates that may be allocable to in-process research and development will be recorded as a one-time charge. Also, any variation from these estimates will change the goodwill reflected in the Unaudited Pro Forma Condensed Consolidated Balance Sheet and the related amortization expense in the Unaudited Pro Forma Condensed Consolidated Statement of Income.
(d)	To eliminate Harris’ $10.0 million investment in Wavtrace (representing a 19.4% ownership) and Harris’ $1.3 million receivable from Wavtrace.
(e)	Reflects the impact of exchanging a portion of Wavtrace employees’ unvested Wavtrace options for unvested Harris options. This transaction will be recorded in accordance with the Financial Accounting Standards Board’s Accounting Interpretation No. 44 “Accounting for Stock-Based Compensation.” Per that standard the unearned intrinsic value of these options as of the date of acquisition (estimated at $4.4 million) must be amortized to compensation expense over the remaining vesting period. Also, the difference between the fair value of these options as of the acquisition date (estimated at $5.8 million) and the amount being amortized to compensation expense should be recognized as a portion of the purchase price.
(f)	To reflect the impact of the write-off of purchased in-process research and development. The in-process research and development has been written off against retained earnings in the unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2000. Pursuant to Regulation S-X, this write-off has not been reflected in the Unaudited Pro Forma Condensed Consolidated Statement of Income for the fiscal year ended June 30, 2000 as the write-off is deemed to be a material non-recurring charge. This write-off will be recorded as a one-time charge during the first quarter of fiscal 2001.
(g)	Represents the elimination of the historical shareholders’ equity accounts of Wavtrace.
(h)	Represents the amortization of goodwill and other intangible assets including assembled work force for the fiscal year ended June 30, 2000 assuming the transaction occurred on July 3, 1999.
(i)	Reflects the decrease in interest income as a result of the lower idle cash balance using an interest rate of 6.25%, which approximates the rate of interest earned on idle cash in the fiscal year ended June 30, 2000.
(j)	Represents the tax benefit that would be recognized on the reduction of interest income using the 35% effective tax rate for Harris. Note that the other pro forma adjustments are not deductible for tax purposes.
(k)	Since the pro forma adjustments result in a net loss for Harris, the average fully diluted shares must equal the average basic shares to avoid anti-dilution.

F-27

SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

		HARRIS CORPORATION
		By: /s/ Bryan R. Roub
		Name: Bryan R. Roub
		Title: Senior Vice President & Chief Financial Officer
Date:	September 14, 2000

EXHIBIT INDEX

Exhibit No.
Under Reg.
S-K, Item 601	Description
The following documents are filed as an Exhibits to this Report:
2.1	Agreement of Merger, dated as of July 28, 2000, among Harris Corporation, WT Acquisition Corp., Wavtrace, Inc., and Thomas T. van Overbeek (including the first amendment thereto).
2.2	Indemnification and Escrow Agreement, dated as of August 31, 2000, among Harris Corporation, Wavtrace, Inc., Thomas T. van Overbeek, and Citibank, N.A.
23.1	Consent of Ernst & Young LLP, independent accountants.
99.1	Press Release, dated August 31, 2000, announcing that Harris has completed the previously announced purchase of Wavtrace, Inc.

  EX-2.1 2 l83749aex2-1.txt EXHIBIT 2.1 1 Exhibit 2.1 AGREEMENT OF MERGER DATED AS OF JULY 28, 2000 AMONG HARRIS CORPORATION, WT ACQUISITION CORP. WAVTRACE, INC. AND THOMAS T. VAN OVERBEEK 2 TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS.......................................................2 1.1. Definitions.......................................................2 ARTICLE II THE MERGER.......................................................8 2.1. Surviving Corporation.............................................8 2.2. Effects of the Merger.............................................8 2.3. Articles of Incorporation, Bylaws, Directors and Officers.........9 ARTICLE III CONVERSION OF SHARES; DETERMINATION OF PURCHASE PRICE...........9 3.1. Conversion Terms..................................................9 3.2. Determination of Purchase Price...................................9 3.3. Exchange Procedures..............................................12 ARTICLE IV CLOSING.........................................................14 4.1. Closing Date.....................................................14 4.2. Filing Articles of Merger and Effectiveness......................14 4.3. Parent's Deliveries..............................................15 4.4. Mergerco's Deliveries............................................15 4.5. The Company's Deliveries.........................................16 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDER REPRESENTATIVE...................................................16 5.1. Organization and Capital Structure...............................17 5.2. Subsidiaries and Investments.....................................18 5.3. Authority........................................................18 5.4. Financial Statements.............................................19 5.5. Operations Since Balance Sheet Date..............................19 5.6. No Undisclosed Liabilities.......................................22 5.7. Taxes............................................................22 5.8. Availability of Assets and Legality of Use.......................23 5.9. Governmental Permits.............................................23 5.10. Real Property...................................................24 5.11. Real Property Leases............................................24 5.12. Condemnation....................................................24 5.13. Personal Property...............................................25 5.14. Personal Property Leases........................................25 5.15. Intellectual Property; Software.................................25 5.16. Title to Property...............................................28 5.17. Employee Benefit Plans..........................................28 5.18. Employee Relations..............................................32 5.19. Contracts; Product Warranties...................................32 3 5.20. Status of Contracts.............................................33 5.21. No Violation, Litigation or Regulatory Action...................34 5.22. Environmental Matters...........................................34 5.23. Insurance.......................................................36 5.24. Customers and Suppliers.........................................37 5.25. Budgets.........................................................37 5.26. Consent Materials...............................................37 5.27. Required Vote of Shareholders...................................38 5.28. No Finder.......................................................38 5.29. Ultimate Parent Entity..........................................38 5.30. Disclosure......................................................38 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO...........38 6.1. Organization and Capital Structure...............................38 6.2. Authority........................................................39 6.3. Information Supplied by Parent for Consent Materials.............40 6.4. No Finder........................................................40 ARTICLE VII ACTION PRIOR TO THE EFFECTIVE TIME.............................40 7.1. Action by the Company; Shareholder Meeting and Preparation of the Consent Materials............................................40 7.2. Action by Parent.................................................41 7.3. Investigation of the Company by Parent...........................41 7.4. Preserve Accuracy of Representations and Warranties..............42 7.5. Consents of Third Parties; Governmental Approvals................42 7.6. Conduct of Business Prior to the Effective Time..................42 7.7. Notification by the Company of Certain Matters...................45 7.8. Mutual Cooperation; Reasonable Best Efforts......................46 7.9. Company Stock Options............................................46 7.10. State Takeover Laws.............................................48 7.11. Termination of Company 401(k) Plan..............................48 ARTICLE VIII ADDITIONAL AGREEMENTS.........................................48 8.1. Employee Benefits................................................48 ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO......48 9.1. No Misrepresentation or Breach of Covenants and Warranties.......48 9.2. No Changes or Destruction of Property............................49 9.3. No Restraint or Injunction.......................................49 9.4. Necessary Governmental Approvals.................................49 9.5. Necessary Consents...............................................49 9.6. Shareholder Approval and Conversion of Preferred Stock...........50 9.7. Dissenters' Rights...............................................50 9.8. Effective Agreements.............................................50 9.9. Other Convertible Securities.....................................50 ii 4 9.10. Agreement with Wideband.........................................50 9.11. Opinion of Intellectual Property Counsel........................50 ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY...............51 10.1. No Misrepresentation or Breach of Covenants and Warranties......51 10.2. No Restraint or Injunction......................................51 10.3. Necessary Governmental Approvals................................51 10.4. Shareholder Approval............................................51 10.5. Effective Agreements. The Escrow Agreement shall be in full force and effect................................................51 ARTICLE XI TERMINATION.....................................................51 11.1. Termination Rights..............................................51 11.2. Notice of Termination...........................................52 11.3. Effect of Termination...........................................52 ARTICLE XII GENERAL PROVISIONS.............................................52 12.1. Survival of Obligations.........................................52 12.2. Confidential Nature of Information..............................52 12.3. No Public Announcement..........................................53 12.4. Notices.........................................................53 12.5. Successors and Assigns; Shareholder Representative..............54 12.6. Entire Agreement; Amendments....................................56 12.7. Interpretation..................................................56 12.8. Waivers.........................................................56 12.9. Fees and Expenses...............................................56 12.10. Partial Invalidity.............................................57 12.11. Execution in Counterparts......................................57 12.12. Further Assurances.............................................57 12.13. Governing Law..................................................57 EXHIBITS A Foster Employment Agreement B Escrow Agreement C Non-Competition Agreement D Opinion of Company Counsel E Release F Foster Non-Competition Agreement iii 5 SCHEDULES A Significant Shareholders B Employee to Execute Employment Agreement C Persons to Execute Non-Competition Agreements D Shareholders to Execute Releases 1.1 Exceptions to Agreed Accounting Principles 5.1 Organization and Capital Structure 5.3 Noncontravention 5.4 Financial Statements 5.5(A) Operations Since Balance Sheet Date 5.5(B) Conduct of Business Since Balance Sheet Date 5.7 Taxes 5.9 Governmental Permits 5.10 Owned Real Property 5.11 Leased Real Property 5.13 Owned Personal Property 5.14 Leased Personal Property 5.15 Intellectual Property; Software 5.16 Title to Property 5.17(A) ERISA Benefit Plans 5.17(B) Non-ERISA Commitments 5.17(C) Multiemployer Plans 5.17(E) Plan Administration 5.17(F) Liability Under Plans 5.17(I) List of Employees 5.17(K) Conflicts of Interest 5.18 Employee Relations 5.19 Contracts; Product Warranties 5.21 Violations, Litigation and Regulatory Actions 5.22 Environmental Matters 5.23 Insurance 5.24 Customers and Suppliers 5.25 Budgets 7.9 Company Options 9.5 Necessary Consents iv 6 AGREEMENT OF MERGER AGREEMENT OF MERGER, dated as of July 28, 2000, among Harris Corporation, a Delaware corporation ("PARENT"), WT Acquisition Corp., a Washington corporation ("MERGERCO"), Wavtrace, Inc., a Washington corporation (the "COMPANY"), and Thomas T. van Overbeek, a natural person (the "SHAREHOLDER REPRESENTATIVE") (Mergerco and the Company being hereinafter sometimes referred to as the "CONSTITUENT CORPORATIONS"). W I T N E S S E T H: WHEREAS, Mergerco is a Washington corporation having an authorized capital of 1,000 shares of common stock, par value $ .01 per share, all of which are issued and outstanding and owned of record and beneficially by Parent; and WHEREAS, the Company is a Washington corporation having an authorized capital of (i) 60,000,000 shares of common stock, par value $.001 per share (the "COMPANY COMMON STOCK"), of which, as of the date hereof, 4,295,769 shares are issued and outstanding, and (ii) 41,000,000 shares of preferred stock, par value $.001 per share (the "PREFERRED STOCK"), of which (A) 4,986,142 shares have been designated Series A Preferred Stock (of which, as of the date hereof, 4,686,666 shares are issued and outstanding and are convertible into 5,957,627 shares of Company Common Stock), (B) 4,044,668 shares have been designated Series B Preferred Stock (of which, as of the date hereof, 4,014,668 shares are issued and outstanding), and are convertible into 8,961,313 shares of Company Common Stock), and (C) 31,969,190 shares have been designated Series C Preferred Stock (of which, as of the date hereof, 26,916,467 shares are issued and outstanding); and are convertible into 26,916,467 shares of Company Common Stock); and WHEREAS, the Company is engaged in the business of the design and manufacturing of telecommunications equipment; and WHEREAS, the respective Boards of Directors of the Constituent Corporations and of Parent have adopted the merger (the "MERGER") of Mergerco into the Company pursuant to the terms and conditions of this Agreement, and the Board of Directors of the Company has directed that this Agreement be submitted to the Company's shareholders for approval; and WHEREAS, Parent and each of the individuals and entities identified on SCHEDULE A (the "SIGNIFICANT SHAREHOLDERS") have entered into Voting Agreements (the "VOTING AGREEMENTS") dated as of the date hereof; and -1- 7 WHEREAS, Parent, Mergerco, the Company and the Shareholder Representative desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe various conditions to the Merger; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, it is hereby agreed among the parties as follows: ARTICLE I DEFINITIONS 1.1. DEFINITIONS. In this Agreement, the following terms have the meanings specified or referred to in this SECTION 1.1 and shall be equally applicable to both the singular and plural forms. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time to the extent permitted by the applicable provisions thereof and by this Agreement. "AFFILIATE" means, with respect to any Person, any other Person which directly or indirectly controls, is controlled by or is under common control with such Person. "AGREED ACCOUNTING PRINCIPLES" means generally accepted accounting principles consistently applied, PROVIDED that, with respect to any matter as to which there is more than one generally accepted accounting principle, Agreed Accounting Principles means the generally accepted accounting principles applied in the preparation of the Audited Financial Statements included in SCHEDULE 5.4; and, PROVIDED, FURTHER, that, notwithstanding the foregoing, Agreed Accounting Principles shall include the accounting policies and be subject to the exceptions described in SCHEDULE 1.1. "BALANCE SHEET" means the audited balance sheet of the Company as of December 31, 1999 included in SCHEDULE 5.4. "BALANCE SHEET DATE" means December 31, 1999. "BEST KNOWLEDGE" or "KNOWLEDGE" or any similar reference or derivation thereof, means with reference to a party hereto the current conscious awareness of any of the directors and officers of any such party, including any knowledge or awareness of facts or circumstances that any such party should have discovered after due inquiry. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.ss. 9601 ET SEQ., any amendments thereto, any successor statutes, and any regulations promulgated thereunder. "CLOSING" means the closing of the Merger of Mergerco with and into the Company in accordance with ARTICLE IV. "CLOSING CONSIDERATION" means a dollar amount equal to the Purchase Price LESS the Escrow Amount. -2- 8 "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMPANY ANCILLARY AGREEMENTS" means all agreements, instruments and documents being or to be executed and delivered by the Company under this Agreement or in connection herewith. "COMPANY GROUP" means any "affiliated group" (as defined in SECTION 1504(a) of the Code without regard to the limitations contained in SECTION 1504(b) of the Code) that, at any time on or before the Effective Time, includes or has included the Company or any predecessor of or successor to the Company (or another such predecessor or successor), or any other group of corporations which, at any time on or before the Effective Date, files or has filed Tax Returns on a combined, consolidated or unitary basis with the Company or any predecessor of or successor to the Company (or another such predecessor or successor). "COMPANY PROPERTY" means any real or personal property, plant, building, facility, structure, underground storage tank, equipment or unit, or other asset owned, leased or operated by the Company (including any surface water thereon or adjacent thereto and any soil or ground water thereunder), whether currently or at any previous time. "CONTAMINANT" means any waste, pollutant, hazardous or toxic substance or waste, petroleum, petroleum-based substance or waste, special waste, or any constituent of any such substance or waste. "COURT ORDER" means any judgment, order, award or decree of any foreign, federal, state, local or other court or tribunal and any award in any arbitration proceeding. "DISSENTERS' SHARES" means shares of Company Common Stock with respect to which appraisal rights shall have been properly perfected in accordance with the WBCA. "EMPLOYMENT AGREEMENTS" means the Employment Agreements between the Company and the individuals identified on SCHEDULE B, in a form mutually agreed to by the parties thereto. "ENCUMBRANCE" means any lien, claim, charge, security interest, mortgage, pledge, easement, conditional sale or other title retention agreement, defect in title, covenant or other restriction of any kind. "ENVIRONMENTAL ENCUMBRANCE" means an Encumbrance in favor of any Governmental Body for (i) any liability under any Environmental Law, or (ii) damages arising from, or costs incurred by such Governmental Body in response to, a Release or threatened Release of a Contaminant into the environment. -3- 9 "ENVIRONMENTAL LAW" means all Requirements of Laws derived from or relating to all federal, state and local laws or regulations relating to or addressing the environment, health or safety, including but not limited to CERCLA, OSHA and RCRA and any state equivalent thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any regulations promulgated thereunder. "ESCROW AGENT" means that Person who shall be mutually selected by Parent and the Shareholder Representative to act as escrow agent pursuant to the Escrow Agreement. "ESCROW AGREEMENT" means the Indemnification and Escrow Agreement in the form of EXHIBIT B, subject to any reasonable revisions requested by the Escrow Agent and agreed to by Parent and the Shareholder Representative. "ESCROW AMOUNT" means a dollar amount equal to the sum of 10% of the Purchase Price. "ESCROW PAYMENT" means any amount payable to the former shareholders of the Company pursuant to the Escrow Agreement. "FOSTER EMPLOYMENT AGREEMENT" means the Employment Agreement, in the form of EXHIBIT A, between the Company and Robert Foster. "FOSTER NON-COMPETITION AGREEMENT" means the Non-Competition Agreement, in the form of EXHIBIT F, between the Company and Robert Foster. "FULLY DILUTED PER SHARE PRICE" means $175 million divided by the number of fully diluted shares of Company Common Stock assuming the cash conversion or exercise of all outstanding convertible securities, warrants and options for Company capital stock. "GOVERNMENTAL BODY" means any foreign, federal, state, local or other governmental authority or regulatory body. "IRS" means the Internal Revenue Service. "LETTER AGREEMENT" means the Letter Agreement dated July 7, 2000 among Parent, the Company and the shareholders of the Company that executed such agreement. "MATERIAL ADVERSE EFFECT" means any change or effect (or any development that, insofar as can be reasonably foreseen, would result in any change or effect) that is materially adverse to the assets, business, financial condition, results of operations or prospects of the applicable person or persons. "MERGER" has the meaning in the fourth recital of this Agreement. -4- 10 "MERGERCO" has the meaning specified in the first paragraph of this Agreement. "NON-COMPETITION AGREEMENTS" means the Non-Competition Agreements, in the form of EXHIBIT C, to be dated the Effective Date among the Company, Parent and each of the Persons identified on SCHEDULE C. "OSHA" means the Occupational Safety and Health Act, 29 U.S.C.ss. 651 ET SEQ., any amendment thereto, any successor statute, and any regulations promulgated thereunder. "PARENT ANCILLARY AGREEMENTS" means all agreements, instruments and documents being or to be executed and delivered by Parent under this Agreement or in connection herewith. "PARENT GROUP MEMBER" means Parent and its Affiliates and their respective successors and assigns, including, after the Effective Time, the Surviving Corporation. "PER SHARE CLOSING PAYMENT" means the Closing Consideration DIVIDED BY the number of shares of Company Common Stock (other than such shares held by Parent) outstanding at the Effective Time. "PER SHARE ESCROW PAYMENT" means, in respect of any Escrow Payment, the amount of such payment DIVIDED BY the number of shares of Company Common Stock (other than such shares held by Parent) outstanding at the Effective Time. "PERMITTED ENCUMBRANCES" means (a) liens for taxes and other governmental charges and assessments which are not yet due and payable, (b) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen and other like liens arising in the ordinary course of business for sums not yet due and payable and (c) other liens or imperfections on property which are not material in amount, do not interfere with, and are not violated by the consummation of the transactions contemplated by, this Agreement and do not materially detract from the value or marketability of, or materially impair the existing use of, the property affected by such lien or imperfection. "PERSON" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or Governmental Body. "PREFERRED STOCK HOLDERS" means the holders of shares of Preferred Stock of the Company. "PURCHASE PRICE" means $ 175 million LESS (i) (x) the Fully Diluted Per Share Price less the weighted average of the exercise prices of the unvested options to acquire Company Common Stock multiplied by (y) the number of unvested options to acquire Company Common Stock; (ii) the Fully Diluted Per Share Price multiplied by 14,464,573 (the number of fully diluted shares of Company Common Stock held by Parent); (iii) the aggregate dollar amount that shall be paid to the holders of vested -5- 11 Company Stock Options that have not been exercised prior to the Effective Time pursuant to SECTION 7.9(b); and (iv) 2.1 million in respect of the dollar amount that the Company shall owe to Hambrecht & Quist LLC ("H & Q") upon consummation of the Merger pursuant to the letter agreement between the Company and H & Q dated January 24, 2000 PLUS the amount of cash, if any, received by the Company upon exercise of any of the warrants held by parties other than Parent. "RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C.ss. 6901 ET SEQ., and any successor statute, and any regulations promulgated thereunder. "RELEASE" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant into the indoor or outdoor environment or into or out of any Company Property, including the movement of Contaminants through or in the air, soil, surface water, groundwater or any Company Property. "REMEDIAL ACTION" means actions required to (i) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (ii) prevent the Release or threatened Release or minimize the further Release of Contaminants or (iii) investigate and determine if a remedial response is needed and to design such a response and post-remedial investigation, monitoring, operation and maintenance and care. "REQUIREMENTS OF LAWS" means any foreign, federal, state and local laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued or promulgated by any Governmental Body (including, without limitation, those pertaining to electrical, building, zoning, environmental and occupational safety and health requirements) or common law. "SHAREHOLDERS" mean the holders of shares of capital stock of the Company. "SHAREHOLDER REPRESENTATIVE ANCILLARY AGREEMENTS" means all agreements, instruments and documents being or to be executed and delivered by the Shareholder Representative under this Agreement or in connection herewith. "TARGET NET WORTH" means negative $9.3 million excluding (i) the amount that the Company shall owe to Hambrecht & Quist LLC ("H & Q") upon consummation of the Merger pursuant to the letter agreement between the Company and H & Q dated January 24, 2000 and (ii) up to $200,000 of Acquisition Expenses of the Shareholder Representative and the Company relating to the transactions contemplated by this Agreement. "TAX" (and with correlative meaning "Taxes" and "Taxable") means: (i) any federal, state, local or foreign net income, alternative or add-on minimum, gross income, gross receipts, property, ad valorem, sales, use, transfer, gains, license, franchise, severance, excise, employment, payroll, environmental, windfall profit, withholding, alternative or add on minimum tax, -6- 12 stamp or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Body; and (ii) any liability of the Company or any subsidiary for the payment of amounts with respect to payments of a type described in clause (i) of this definition as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation of the Company or any subsidiary under any tax sharing arrangement or Tax indemnity arrangement. "TAX RETURN" means any return, report or similar statement required to be filed with respect to any Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax. "VALUATION DATE" means the close of business on the last business day prior to the Effective Date. "VALUATION DATE NET WORTH" means the excess of the total assets over the total liabilities reflected in the Valuation Date Balance Sheet. "WBCA" means the Washington Business Corporation Act, as amended. Each of the following terms is defined on the page of this Agreement set forth opposite such term: ACCOUNTING FIRM.........................................................15 COMPANY COMMON STOCK.....................................................6 ACQUISITION EXPENSES....................................................61 ADDITIONAL ACCOUNTING REPORT............................................16 AGREED ADJUSTMENTS......................................................15 ASSOCIATE...............................................................36 AUDITED FINANCIAL STATEMENTS............................................24 CLOSING DATE............................................................19 COMPANY..................................................................6 COMPANY AGREEMENTS......................................................38 COMPANY CERTIFICATES....................................................16 CONSENT MATERIALS.......................................................42 CONSTITUENT CORPORATIONS.................................................6 COPYRIGHTS..............................................................30 EFFECTIVE DATE..........................................................19 EFFECTIVE TIME..........................................................19 ERISA AFFILIATE.........................................................36 EXCHANGE AGENT..........................................................16 EXCHANGE FUND...........................................................16 GOVERNMENTAL PERMITS....................................................28 INTELLECTUAL PROPERTY...................................................30 LEASED REAL PROPERTY....................................................29 -7- 13 MERGER...................................................................6 MERGER CONSIDERATION....................................................14 MERGERCO.................................................................6 MULTIEMPLOYER PLANS.....................................................34 NET WORTH ADJUSTMENT AMOUNT.............................................16 NON-ERISA COMMITMENTS...................................................33 OWNED REAL PROPERTY.....................................................29 OWNED SOFTWARE..........................................................32 PARENT...................................................................6 PATENT RIGHTS...........................................................30 PENSION PLANS...........................................................33 PREFERRED STOCK..........................................................6 PRELIMINARY ACCOUNTING REPORT...........................................14 PRELIMINARY PURCHASE PRICE..............................................14 PRELIMINARY VALUATION DATE BALANCE SHEET................................14 PRIOR PENSION PLANS.....................................................33 SHAREHOLDER MEETING.....................................................42 SHAREHOLDER REPRESENTATIVE...............................................6 SIGNIFICANT SHAREHOLDERS.................................................6 SOFTWARE................................................................30 STATEMENTS OF OPERATIONS................................................24 SURVIVING CORPORATION...................................................13 TRADE SECRETS...........................................................30 TRADEMARKS..............................................................30 UNAUDITED FINANCIAL STATEMENTS..........................................24 VALUATION DATE BALANCE SHEET............................................15 VOTING AGREEMENTS........................................................6 WARN....................................................................35 WELFARE PLANS...........................................................33 ARTICLE II THE MERGER 2.1. SURVIVING CORPORATION. Subject to the conditions contained herein and in accordance with the provisions of this Agreement and the WBCA at the Effective Time Mergerco shall be merged with and into the Company, which, as the corporation surviving in the Merger (the "SURVIVING CORPORATION"), shall continue unaffected and unimpaired by the Merger to exist under and be governed by the laws of the State of Washington. Upon the effectiveness of the Merger, the separate existence of Mergerco shall cease except to the extent provided by law in the case of a corporation after its merger into another corporation. 2.2. EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Section 23B.11.060 of the WBCA. -8- 14 2.3. ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS AND OFFICERS. The Articles of Incorporation and Bylaws of Mergerco, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation and Bylaws of the Surviving Corporation. The directors and officers of the Mergerco immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation until their respective successors are duly elected and qualified. ARTICLE III CONVERSION OF SHARES; DETERMINATION OF PURCHASE PRICE 3.1. CONVERSION TERMS. As of the Effective Time, by virtue of the Merger and without any action on the part of any shareholder of the Company or Mergerco: (a) Each share of common stock of Mergerco issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, par value $.001 per share, of the Surviving Corporation. (b) All shares of Company Common Stock that immediately prior to the Effective Time are held by Parent shall be cancelled and revert to the status of authorized but unissued shares and no capital stock of the Surviving Corporation, cash or other consideration shall be paid or delivered in exchange therefor. (c) Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (after taking into account the cancellation of shares of Company Common Stock pursuant to this SECTION 3.1 and other than Dissenters' Shares) shall be converted into and become the right to receive the following (the "MERGER CONSIDERATION"): (i) the Per Share Closing Payment; PLUS (ii) the Per Share Escrow Payments, if any. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired. (d) All unvested Company Stock Options outstanding immediately subsequent to the Effective Time shall become options to purchase common stock of Parent pursuant to SECTION 7.9. 3.2. DETERMINATION OF PURCHASE PRICE. (a) As promptly as practicable following the Effective Date (but not later than 60 days after the Effective Date), Parent shall cause the Company to: -9- 15 (i) prepare, in accordance with the Agreed Accounting Principles, a balance sheet of the Company as of the Valuation Date (the "PRELIMINARY VALUATION DATE BALANCE SHEET"), (ii) determine the Purchase Price in accordance with the provisions of this Agreement (such Purchase Price as determined by the Company being called the "PRELIMINARY PURCHASE PRICE") and (iii) deliver to the Shareholder Representative the Preliminary Valuation Date Balance Sheet and a certificate setting forth the Preliminary Purchase Price (the "PRELIMINARY ACCOUNTING REPORT"). (b) Promptly following receipt of the Preliminary Accounting Report, the Shareholder Representative shall review the same and, within 30 days after the date of such receipt, may deliver to Parent a certificate signed by it setting forth its objections to the Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price as set forth in the Preliminary Accounting Report, together with a summary of the reasons therefor and calculations which, in its view, are necessary to eliminate such objections. In the event the Shareholder Representative does not so object within such 30-day period, the Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price set forth in the Preliminary Accounting Report shall be final and binding as the "VALUATION DATE BALANCE SHEET" and the "PURCHASE PRICE," respectively, for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement. (c) In the event the Shareholder Representative so objects within such 30-day period, Parent and the Shareholder Representative shall use their reasonable best efforts to resolve by written agreement (the "AGREED ADJUSTMENTS") any differences as to the Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price and, in the event Parent and the Shareholder Representative so resolve any such differences, the Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price set forth in the Preliminary Accounting Report as adjusted by the Agreed Adjustments shall be final and binding as the "VALUATION DATE BALANCE SHEET" and the "PURCHASE PRICE," respectively, for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement. In the event any objections raised by the Shareholder Representative are not resolved by Agreed Adjustments within the 30-day period next following such 30-day period, then Parent and the Shareholder Representative shall jointly select a national accounting firm acceptable to both Parent and the Shareholder Representative (or if they cannot agree on such selection, a national accounting firm will be selected by lot after eliminating the independent public accountants for Parent and the Company) and the firm so selected (the "ACCOUNTING FIRM") shall be directed by Parent and the Shareholder Representative to conduct a special audit of the Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price as promptly as reasonably practicable and, upon completion of such audit, to deliver written notice to each of Parent and the Shareholder Representative setting forth: -10- 16 (i) a summary of all adjustments (including all adjustments for immaterial misstatements which became known to the Accounting Firm during the course of such audit) to the Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price necessary to permit the Accounting Firm to deliver the hereinafter described audit report; and (ii) an audit report stating (without qualification) that in its opinion (x) the Preliminary Valuation Date Balance Sheet (after giving effect to such adjustments) as audited by such firm has been prepared in accordance with the Agreed Accounting Principles, (y) the Preliminary Purchase Price (after giving effect to such adjustments) has been determined in accordance with the provisions of this Agreement, and (z) all adjustments (which became known to the Accounting Firm during the course of the above-described audit) for items or matters, regardless of the amount thereof, were taken into account in the adjustments referred to in clause (i) (such written notice and related summary and certificate being herein called the "ADDITIONAL ACCOUNTING REPORT"). The Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price, as so determined but after giving effect to the adjustments set forth in the Additional Accounting Report shall be final and binding as the "VALUATION DATE BALANCE SHEET" and the "PURCHASE PRICE," respectively, for purposes of this Agreement, but shall not limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement. (d) The parties hereto shall make available to Parent, the Shareholder Representative and, if applicable, the Accounting Firm, such books, records and other information (including work papers) as they may reasonably request to audit or review the Preliminary Accounting Report hereunder. One half of the fees and expenses of the Accounting Firm related to any special audit of the Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price hereunder shall be paid by the former shareholders of the Company (in the form of a payment pursuant to the Escrow Agreement) and the other half shall be paid by Parent. In connection with any such special audit or determination or review of the Preliminary Valuation Date Balance Sheet or the Preliminary Purchase Price hereunder, Parent, the Shareholder Representative and, if applicable, the Accounting Firm shall exchange work papers and other information related to such audit or the determination of the Valuation Date Balance Sheet and the Closing Consideration hereunder with a view towards resolving any potential differences with respect thereto. (e) Promptly after the determination of the Purchase Price pursuant to this SECTION 3.2 that is final and binding, Parent shall be entitled to receive a payment, pursuant to the terms and subject to the conditions of the Escrow Agreement, in an amount, if any, by which the Target Net Worth exceeds the Valuation Date Net Worth (the "NET WORTH ADJUSTMENT AMOUNT"). -11- 17 3.3. EXCHANGE PROCEDURES. (a) EXCHANGE AGENT. On the Closing Date, Parent shall deposit with an exchange to be determined by Parent prior to the Closing (the "EXCHANGE AGENT"), for the benefit of the holders of shares of Company Common Stock, for exchange in accordance with this ARTICLE III, through the Exchange Agent, cash equal to the Closing Consideration (such cash, together with any earnings with respect thereto, and such certificates being hereinafter referred to as the "EXCHANGE FUND"). (b) EXCHANGE PROCEDURES. (i) Prior to the Effective Date, the counsel to the Company or the Exchange Agent shall mail to each holder of record of a certificate or certificates that immediately prior to the Effective Time represented outstanding shares of Company Common Stock that were converted into the right to receive the Merger Consideration (the "COMPANY CERTIFICATES") pursuant to SECTION 3.1, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Company Certificates shall pass, only upon delivery of the Company Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Company Certificates in exchange for the Per Share Closing Payment for each share of Company Common Stock represented by such Company Certificates. (ii) Upon surrender of a Company Certificate for cancellation to the Exchange Agent, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Company Certificate shall be entitled to receive, in exchange for each share of Company Common Stock represented thereby, the Per Share Closing Payment, and the Company Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock that is not registered in the transfer records of the Company, payment may be made to a Person other than the Person in whose name the Company Certificate so surrendered is registered, if such Company Certificate shall be properly endorsed or otherwise be in proper form for transfer and the Person requesting such payment shall pay any transfer or other taxes required by reason of such payment to a Person other than the registered holder of such Company Certificate or establish to the satisfaction of Parent that such tax has been paid or is not applicable. Subject to the applicable provisions of the WBCA, until surrendered as contemplated by this SECTION 3.3, each Company Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Per Share Closing Payment for each share of Company Common Stock represented by such Company Certificate as contemplated by this SECTION 3.3. No interest shall be paid or accrue on -12- 18 any cash payable, whether in respect of the Per Share Closing Payments, dividends or otherwise, upon surrender of any Company Certificate. (c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. The Merger Consideration paid in accordance with the terms of this ARTICLE III upon conversion of any shares of Company Common Stock shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares of Company Common Stock, subject, however, to the Surviving Corporation's obligations to pay or provide for the rights of dissenters. If, after the Effective Time, any certificates formerly representing shares of Company Common Stock are presented to the Surviving Corporation or the Exchange Agent for any reason, they shall be canceled and exchanged as provided in this ARTICLE III. (d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund that remains undistributed to the holders of Company Common Stock for twelve months after the Closing Date shall be delivered to the Surviving Corporation, upon demand, and any holder of Company Common Stock who has not theretofore complied with this ARTICLE III shall thereafter look only to the Surviving Corporation for payment of its claim for Merger Consideration. (e) NO LIABILITY. None of Parent, the Surviving Corporation or the Exchange Agent shall be liable to any Person in respect of any cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Company Certificate has not been surrendered prior to five years after the Effective Time (or immediately prior to such earlier date on which the Per Share Closing Payments payable in respect of such Company Certificate would otherwise escheat to or become the property of any Governmental Body), any such shares, cash dividends or distribution in respect of such Company Certificate shall, to the extent permitted by applicable law, become the property of the Surviving Corporation, free and clear of all claims or interest of any Person previously entitled thereto. (f) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash included in the Exchange Fund, as directed by the Surviving Corporation, on a daily basis. Any interest and other income resulting from such investments shall be paid to the Surviving Corporation. (g) WITHHOLDING RIGHTS. The Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable to any holder of Company Common Stock pursuant to this Agreement such amounts as may be required to be deducted and withheld with respect to the making of such payment under the Code, or under any provision of state, local or foreign tax law. The Surviving Corporation will pay such withheld amounts to the appropriate taxing authority. (h) CERTAIN ADJUSTMENTS. If after the date hereof and on or prior to the Closing Date, the outstanding shares of Company Common Stock shall be changed into a different number of shares by reason of any reclassification, recapitalization, split-up, -13- 19 combination or exchange of shares, or any dividend payable in stock or other securities is declared thereon with a record date within such period, or any similar event shall occur, the Per Share Closing Payment will be adjusted accordingly to provide to the holders of Company Common Stock the same economic effect as contemplated by this Agreement prior to such reclassification, recapitalization, split-up, combination, exchange or dividend or similar event. This provision is not intended to affect the need for either party to obtain the other party's consent to take such an action under any other provision of this Agreement. (i) DISSENTER'S RIGHTS. Notwithstanding any provision of this Agreement to the contrary, any Dissenters' Shares shall not be converted into or represent a right to receive any of the Merger Consideration, but the holder shall only be entitled to such rights as are granted by the WBCA. If a holder of shares of Company Common Stock who demands appraisal of such shares under the WBCA shall effectively withdraw or otherwise lose (through failure to perfect or otherwise) the right to appraisal, then, as of the Effective Time or the occurrence of such event, whichever last occurs, each such share of Company Common Stock shall be converted into and represent only the right to receive the Per Share Closing Payment, without interest, upon the surrender of the certificate or certificates representing such share of Company Common Stock and the Per Share Escrow Payment pursuant to the Escrow Agreement. The Company shall give Parent prompt notice of any written demands for appraisal of any shares of Company Common Stock, attempted withdrawals of such demands, and any other instruments served pursuant to the WBCA received by the Company relating to shareholders' rights of appraisal. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisals of capital stock of the Company, offer to settle any demands or approve any withdrawal of any such demands. ARTICLE IV CLOSING 4.1. CLOSING DATE. The Closing of the Merger shall take place at 10:00 A.M., local time, on the fifth business day following the day on which the last of the conditions set forth in ARTICLES IX and X shall have been fulfilled or waived (if permissible) or at such other time and place as Parent and the Company shall agree at the offices of Venture Law Group, 4750 Carillon Point, Kirkland, WA 98033. The date on which the Closing is actually held is hereinafter sometimes referred to as the "CLOSING DATE." 4.2. FILING ARTICLES OF MERGER AND EFFECTIVENESS. Subject to the fulfillment or waiver of the conditions to the respective obligations of each of the parties set forth in ARTICLE IX or ARTICLE X, as the case may be, at the Closing the parties shall cause the Merger to be consummated by filing a Articles of Merger (which shall be in form and substance reasonably satisfactory to the parties hereto), executed and acknowledged in accordance with the laws of the State of Washington, in the office of the Secretary of State of the State of Washington. The Merger shall become effective upon such filing -14- 20 as provided by the WBCA. The date and time on such date of effectiveness of the Merger are herein called, respectively, the "EFFECTIVE DATE" and the "EFFECTIVE TIME." 4.3. PARENT'S DELIVERIES. Subject to fulfillment or waiver of the conditions set forth in ARTICLE IX, at the Effective Time Parent shall deliver to the Shareholder Representative all of the following: (a) a copy of the Certificate of Incorporation of Parent, certified as of a recent date by the Secretary of State of the State of Delaware; (b) a certificate of good standing of Parent, issued as of a recent date by the Secretary of State of the State of Delaware; (c) a certificate of the Secretary or an Assistant Secretary of Parent, dated the Effective Date, in form and substance reasonably satisfactory to the Shareholder Representative, as to (i) no amendments to the Certificate of Incorporation of Parent since a specified date; (ii) the Bylaws of Parent; and (iii) the incumbency and signatures of the officers of Parent executing this Agreement and any Parent Ancillary Agreement; and (d) the certificate contemplated by SECTION 10.1, duly executed by the President or any Vice President of Parent. 4.4. MERGERCO'S DELIVERIES. Subject to fulfillment or waiver of the conditions set forth in ARTICLE IX, at the Effective Time Mergerco shall deliver to the Shareholder Representative all of the following: (a) a copy of the Articles of Incorporation of Mergerco certified as of a recent date by the Secretary of State of the State of Washington; (b) a certificate of existence/due authorization of Mergerco, issued as of a recent date by the Secretary of State of the State of Washington; (c) a certificate of the Secretary or an Assistant Secretary of Mergerco, dated the Effective Date, in form and substance reasonably satisfactory to the Shareholder Representative, as to (i) no amendments to the Articles of Incorporation of Mergerco since a specified date; (ii) the Bylaws of Mergerco; (iii) the resolutions of the Board of Directors of Mergerco authorizing the execution and performance of this Agreement and the transactions contemplated herein and the written consent of Parent approving this Agreement in accordance with Section 23B.11.030 of the WBCA; and (iv) the incumbency and signatures of the officers of Mergerco executing this Agreement; and (d) the certificate contemplated by SECTION 10.1, duly executed by the President or any Vice President of Mergerco. -15- 21 4.5. THE COMPANY'S DELIVERIES. Subject to fulfillment or waiver of the conditions set forth in ARTICLE X, at the Effective Time the Company shall deliver to Parent all of the following: (a) a copy of the Articles of Incorporation of the Company, certified as of a recent date by the Secretary of State of the State of Washington; (b) a certificate of existence/due authorization of the Company, issued as of a recent date by the Secretary of State of the State of Washington; (c) a certificate of the Secretary or an Assistant Secretary of the Company, dated the Effective Date, in form and substance reasonably satisfactory to Parent, as to (i) no amendments to the Articles of Incorporation of the Company since a specified date; (ii) the Bylaws of the Company; (iii) the resolutions of the Board of Directors of the Company authorizing the execution and performance of this Agreement and the transactions contemplated herein and of the Shareholders and the Preferred Stock Holders approving this Agreement in accordance with the Articles of Incorporation and the Bylaws of the Company and Section 23B.11.030 of the WBCA; (iv) the actions taken by the Preferred Stock Holders necessary in order to effect the automatic conversion of all of the shares of Preferred Stock into shares of Company Common Stock; and (v) the incumbency and signatures of the officers of the Company executing this Agreement and any Seller Ancillary Agreement; (d) an opinion of Venture Law Group, a Professional Corporation, counsel to the Company, dated the Effective Date and in form and substance reasonably satisfactory to Parent, substantially in the form contained in EXHIBIT D; (e) all consents, waivers or approvals obtained by the Company with respect to the consummation of the transactions contemplated by this Agreement; (f) resignations of each of the directors and each of the officers of the Company, effective as of the Effective Time; (g) the certificates contemplated by SECTIONS 9.1 and 9.2, duly executed by the President or any Vice President of the Company; and (h) releases executed by those Shareholders set forth on SCHEDULE D, substantially in the form contained in EXHIBIT E. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDER REPRESENTATIVE As an inducement to Parent and Mergerco to enter into this Agreement and to consummate the transactions contemplated hereby, the Shareholder Representative represents and warrants to Parent and Mergerco and agrees as to those representations and warranties made by the Shareholder Representative in SECTION 5.3, -16- 22 and the Company represents and warrants to Parent and Mergerco and agrees as follows: 5.1. ORGANIZATION AND CAPITAL STRUCTURE. The Company is a corporation duly organized, and validly existing under the laws of the State of Washington. The Company is duly qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions listed in SCHEDULE 5.1, which are the only jurisdictions in which the ownership or leasing of the its assets or the conduct of its business requires such qualification, except where the failure to be so qualified would not individually or in the aggregate have a Material Adverse Effect on the Company, and no other jurisdiction has demanded, requested or otherwise indicated that the Company is required so to qualify. The Company has full power and authority to own or lease and to operate and use its assets and to carry on its business as now conducted or proposed to be conducted. True and complete copies of the Articles of Incorporation and all amendments thereto and of the Bylaws, as amended, of the Company have been delivered to Parent. The authorized capital of the Company consists of (1) 60,000,000 shares of common stock, $.001 par value per share, of which 4,295,769 have been issued and are outstanding, none are held as treasury shares and, except as set forth in SCHEDULE 5.1, none is reserved for any purpose, (2) 4,986,142 shares of Series A Preferred Stock, $.001 par value share, of which 4,686,666 shares have been issued and are outstanding, and are convertible into 5,957,627 shares of Common Stock, (3) 4,044,668 shares of Series B Preferred Stock, $.001 par value per share, of which 4,014,668 shares have been issued and are outstanding, and are convertible into 8,961,313 shares of Common Stock, and (4) 31,969,190 shares of Series C Preferred Stock, $.001 par value per share, of which 26,916,467 shares have been issued and are outstanding and are convertible into 26,916,467 shares of Common Stock. Except warrants to purchase an aggregate of (1) 112,632 shares of Common Stock, (2) 299,476 shares of Series A Preferred Stock (convertible into 380,691 shares of Common Stock), (3) 30,000 shares of Series B Preferred Stock (convertible into 66,964 shares of Common Stock) and (4) 4,422,587 shares of Series C Preferred Stock (convertible into 4,422,587 shares of Common Stock) and 10,680,026 options granted and outstanding under the Company's 1995 and 1999 Stock Option Plans, there are no agreements, arrangements, options, warrants, calls, rights or commitments of any character relating to the issuance, sale, purchase or redemption of any shares of capital stock or other equity interest of the Company, whether on conversion of other securities or otherwise. None of the issued and outstanding shares of the Company's capital stock has been issued in violation of, or is subject to, any preemptive or subscription rights. Except as set forth in this Agreement and in SCHEDULE 5.1, the Company is not a party to, or otherwise have any knowledge of the current existence of, any shareholder agreement, voting trust agreement or any other similar contract, agreement, arrangement, commitment, plan or understanding restricting or otherwise relating to the voting, dividend, ownership or transfer rights of any shares of capital stock of the Company. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable and owned of record and beneficially by the Shareholder Representative, free from all Encumbrances. -17- 23 5.2. SUBSIDIARIES AND INVESTMENTS. The Company does not, directly or indirectly, (i) own, of record or beneficially, any outstanding voting securities or other equity interests in any corporation, partnership, joint venture or other entity or (ii) control any corporation, partnership, joint venture or other entity. The Company has never, directly or indirectly, (i) owned, of record or beneficially, any outstanding voting securities or other equity interests in any corporation, partnership, joint venture or other entity or (ii) controlled any corporation, partnership, joint venture or other entity. 5.3. AUTHORITY. The Company has full power and authority to execute, deliver and perform this Agreement and all of the Company Ancillary Agreements. The execution, delivery and performance of this Agreement and the Company Ancillary Agreements by the Company have been duly authorized, approved and adopted by the Company's board of directors and, except for the approval of this Agreement by the Shareholders in accordance with SECTION 7.1 and the filing contemplated by SECTION 4.2, no other corporate proceedings on the part of the Company are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is the legal, valid and binding obligation of the Company enforceable in accordance with its terms, and each of the Company Ancillary Agreements has been duly authorized by the Company and upon execution and delivery by the Company will be a legal, valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). The Shareholder Representative has full power and authority to execute, deliver and perform this Agreement and all of the Shareholder Representative Ancillary Agreements. This Agreement has been duly executed and delivered by the Shareholder Representative and is the legal, valid and binding obligation of the Shareholder Representative enforceable in accordance with its terms, and each of the Shareholder Representative Ancillary Agreements, upon execution and delivery by the Shareholder Representative, will be a legal, valid and binding obligation of the Shareholder Representative enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). Except as set forth in SCHEDULE 5.3, neither the execution and delivery of this Agreement, any of the Company Ancillary Agreements or any of the Shareholder Representative Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will: (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event -18- 24 creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon, any of the Company's assets, under (1) the Articles of Incorporation or Bylaws of the Company, (2) any Company Agreement, (3) any other material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which either the Company or the Shareholder Representative is a party or any of their respective assets or business is subject or by which either the Company or the Shareholder Representative is bound, (4) any Court Order to which either the Company or the Shareholder Representative is a party or any of their respective assets or business is subject or by which either the Company or the Shareholder Representative is bound, or (5) any Requirements of Laws affecting either the Company or the Shareholder Representative or their respective assets or business; or (ii) require the approval, consent, authorization or act of, or the making by either the Company or the Shareholder Representative of any declaration, filing or registration with, any Person, except as provided in SECTION 4.2. 5.4. FINANCIAL STATEMENTS. SCHEDULE 5.4 contains (i) the audited balance sheets of the Company as of December 31, 1999 and 1998 and the related statements of operations (the "STATEMENTS OF OPERATIONS"), shareholders' equity (deficit) and cash flows for each of the years then ended, together with the appropriate notes to such financial statements, accompanied by the report thereon of Ernst & Young, independent public accountants (the "AUDITED FINANCIAL STATEMENTS"), and (ii) the unaudited balance sheet of the Company as of June 30, 2000 and the related unaudited statements of operations, shareholders' equity (deficit) and cash flows operations for the six months then ended (the "UNAUDITED FINANCIAL STATEMENTS"). Except as disclosed in the notes thereto, the Audited Financial Statements and the Unaudited Financial Statements have been prepared in conformity with generally accepted accounting principles consistently applied and fairly present in all material respects the financial position of the Company at the dates of such balance sheets and the results of its operations and cash flows for the respective periods indicated, except that the Unaudited Financial Statements are subject to normal year-end audit adjustments. None of the financial statements referred to in this SECTION 5.4 contains any material items of special or nonrecurring income except as expressly specified therein. Except as set forth on SCHEDULE 5.4 or in the Unaudited Financial Statements, the Unaudited Financial Statements include all adjustments, which consist only of normal recurring accruals, necessary for such fair presentation, other than normal year-end audit adjustments. All costs and expenses incurred in generating the revenues reflected in the Audited Financial Statements during the respective periods covered thereby that are required by generally accepted accounting principles to be reflected in the Audited Statements of Income are so reflected. 5.5. OPERATIONS SINCE BALANCE SHEET DATE. (a) Except as set forth in SCHEDULE 5.5(A), since the Balance Sheet Date, there has been: -19- 25 (i) no material adverse change in the assets, business, financial condition, results of operations or prospects of the Company, and no fact or condition exists or is contemplated or threatened which might reasonably be expected to cause such a change in the future; and (ii) no damage, destruction, loss or claim, whether or not covered by insurance, or condemnation or other taking adversely affecting in any material respect any of the Company's assets or its business. (b) Except as set forth in SCHEDULE 5.5(B), since the Balance Sheet Date, the Company has conducted its business only in the ordinary course and in conformity with past practice. Without limiting the generality of the foregoing, since the Balance Sheet Date, except as set forth in such Schedule, the Company has not: (i) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver, or granted any option, warrant or other right to purchase, any of its capital stock or other equity interest or any security convertible into its capital stock or other equity interest; (ii) issued, delivered or agreed (conditionally or unconditionally) to issue or deliver any of its bonds, notes or other debt securities, or borrowed or agreed to borrow any funds, other than in the ordinary course of business consistent with past practice; (iii) paid any obligation or liability (absolute or contingent) other than current liabilities reflected on the Balance Sheet and current liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice; (iv) declared or made, or agreed to declare or make, any payment of dividends or distributions to its Shareholders or purchased or redeemed, or agreed to purchase or redeem, any of its capital stock or other equity interest, except in each case as provided herein; (v) except in the ordinary course of business consistent with past practice, made or permitted any material amendment or termination of any Company Agreement; (vi) except as set forth in the budgets included in Schedule 5.25, undertaken or committed to undertake capital expenditures exceeding $50,000 for any single project or related series of projects; (vii) made charitable donations in excess of $1,000 in the aggregate; (viii) sold, leased (as lessor), transferred or otherwise disposed of, or mortgaged or pledged, or imposed or suffered to be imposed any Encumbrance on, any of the assets reflected on the Balance Sheet or any -20- 26 assets acquired by the Company after the Balance Sheet Date, except for inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of its business consistent with past practice and except for Permitted Encumbrances; (ix) cancelled any debts owed to or claims held by the Company (including the settlement of any claims or litigation) other than in the ordinary course of its business consistent with past practice; (x) created, incurred or assumed, or agreed to create, incur or assume, any indebtedness for borrowed money or entered into, as lessee, any capitalized lease obligations (as defined in Statement of Financial Accounting Standards No. 13); (xi) accelerated or delayed collection of notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of its business consistent with past practice; (xii) delayed or accelerated payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of its business consistent with past practice; (xiii) entered into or become committed to enter into any other material transaction except in the ordinary course of business; (xiv) allowed the levels of raw materials, supplies, work-in-process or other materials included in the inventory of the Company to vary in any material respect from the levels customarily maintained in its business; (xv) instituted any increase in any compensation payable to any employee of the Company or in any profit-sharing, bonus, incentive, deferred compensation, insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to employees of the Company; (xvi) prepared or filed any Tax Return inconsistent with past practice or, on any such Tax Return, taken any position, made any election, or adopted any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods (including, without limitation, positions, elections or methods which would have the effect of deferring income to periods after the Closing Date or accelerating deductions to periods prior to the Closing Date); -21- 27 (xvii) made any change in the accounting principles and practices used by the Company from those applied in the preparation of the Balance Sheet and the related statements of income, the shareholders' equity and cash flow for the twelve months ended on the Balance Sheet Date; or (xviii) entered into or become committed to enter into any other material transactions except in the ordinary course of business consistent with past practice. 5.6. NO UNDISCLOSED LIABILITIES. The Company is not subject to any material liability (including, without limitation, unasserted claims, whether known or unknown), whether absolute, contingent, accrued or otherwise, which is not shown or which is in excess of amounts shown or reserved for in the Balance Sheet, other than liabilities of the same nature as those set forth in the Balance Sheet and the notes thereto and reasonably incurred in the ordinary course of its business consistent with past practice after the Balance Sheet Date. 5.7. TAXES. (a) Except as set forth on SCHEDULE 5.7, (i) the Company has filed all Tax Returns required to be filed; (ii) all such Tax Returns are complete and accurate in all material respects and disclose all Taxes required to be paid by the Company for the periods covered thereby and all Taxes shown to be due on such Tax Returns have been timely paid; (iii) the Company is not currently the beneficiary of any extension of time within which to file any Tax Return; (iv) all Taxes (whether or not shown on any Tax Return) owed by the Company have been timely paid; (v) the Company has not waived or been requested to waive any statute of limitations in respect of Taxes which waiver is currently in effect; (vi) the Tax Returns referred to in clause (i), to the extent related to income Taxes, have been examined by the appropriate taxing authority or the period for assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired; (vii) there is no action, suit, investigation, audit, claim or assessment pending or proposed or threatened with respect to Taxes of the Company and, to the best knowledge of the Company, no basis exists therefor; (viii) all deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (i) have been paid in full, except to the extent that a reserve for such Taxes has been reflected on the Unaudited Financial Statements; (ix) all Tax sharing arrangements and Tax indemnity arrangements relating to the Company (other than this Agreement) will terminate prior to the Closing Date and the Company will not have any liability thereunder on or after the Closing Date; (x) there are no liens for Taxes upon the assets of the Company, except liens relating to current Taxes not yet due; (xi) all Taxes which the Company is required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of the Company; (xii) the Company has not been a member of any Company Group and the Company has not had any direct or indirect ownership in any corporation, partnership, joint venture or other entity; (xiii) the Company qualified as, and properly elected to be, at all times from the date of its incorporation through November 18, 1996, an "S corporation" for purposes of Subchapter S of the Code, and during such period also qualified for, and where necessary elected to have applicable, -22- 28 similar tax treatment with respect to all relevant states which, for income or franchise Tax purposes, allow a corporation to be treated as an "S corporation" or similar entity; and (xiv) from the date of its incorporation through November 18, 1996, no entity level Tax was imposed on the Company, including any Tax under section 1374 of the Code; (b) The Company is not, nor has it ever been, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, and neither Mergerco nor Parent is required to withhold tax from the Purchase Price by reason of Section 1445 of the Code. (c) No payment or other benefit, and no acceleration of the vesting of any options, payments or other benefits, will be, as a direct or indirect result of the transactions contemplated by this Agreement, an "excess parachute payment" to a "disqualified individual" as those terms are defined in SECTION 280G of the Code and the Treasury Regulations thereunder, except in the case of payments, benefits or acceleration with respect to which shareholder approval meeting the requirements of Section 280G(b)(5) of the Code is obtained. (d) Following the Closing Date, the Company will not have any liability for Taxes for any taxable year or period that ends on or before the Closing Date or, with respect to any taxable year that begins before and ends after the Closing Date, for the portion of such year that ends on and includes the Closing Date, except to the extent reflected on the Valuation Date Balance Sheet. 5.8. AVAILABILITY OF ASSETS AND LEGALITY OF USE. The assets owned or leased by the Company constitute all the assets used in its business (including, but not limited to, all books, records, computers and computer programs and data processing systems) and are in good condition (subject to normal wear and tear and immaterial impairments of value and damage) and serviceable condition and are generally suitable for the uses for which intended. SCHEDULE 5.8 also sets forth a description of all material services provided by any Affiliate of the Company to the Company utilizing either (i) assets not owned by the Company as of the Effective Time or (ii) employees not listed in SCHEDULE 5.18(G) pursuant to clause (i) of SECTION 5.18(g), and the manner in which the costs of providing such services have been charged to the Company. 5.9. GOVERNMENTAL PERMITS. The Company owns, holds or possesses all licenses, franchises, permits, privileges, immunities, approvals and other authorizations from Governmental Bodies which are necessary to entitle it to own or lease, operate and use its assets and to carry on and conduct its business substantially as currently conducted (herein collectively called "GOVERNMENTAL PERMITS"). SCHEDULE 5.9 sets forth a list and brief description of each Governmental Permit, except for such incidental licenses, permits and other authorizations which would be readily obtainable by any qualified applicant without undue burden in the event of any lapse, termination, cancellation or forfeiture thereof. Complete and correct copies of all of the Governmental Permits have heretofore been delivered to Parent. -23- 29 Except as set forth in SCHEDULE 5.9, (i) the Company has fulfilled and performed its obligations under each of the Governmental Permits, and no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any such Governmental Permit or which permits or, after notice or lapse of time or both, would permit revocation or termination of any such Governmental Permit, or which might adversely affect in any material respect the rights of the Company under any such Governmental Permit; (ii) no notice of cancellation, of default or of any material dispute concerning any Governmental Permit, or of any event, condition or state of facts described in the preceding clause, has been received by, or is known to, the Company; and (iii) each of the Governmental Permits is valid, subsisting and in full force and effect and will continue in full force and effect after the Effective Date of the Merger, in each case without (x) the occurrence of any breach, default or forfeiture of rights thereunder, or (y) the consent, approval, or act of, or the making of any filing with, any Governmental Body. 5.10. REAL PROPERTY. SCHEDULE 5.10 contains a brief description of each parcel of real property owned by the Company (the "OWNED REAL PROPERTY") (showing the record title holder, legal description, permanent index number, location, improvements, the uses being made thereof and any indebtedness secured by a mortgage or other Encumbrance thereon) and of each option held by the Company to acquire any real property. Complete and correct copies of any instruments evidencing Encumbrances, commitments for the issuance of title insurance, title opinions, surveys and appraisals in the possession of the Company or any policies of title insurance currently in force and in the possession of the Company with respect to each such parcel have heretofore been delivered to Parent. 5.11. REAL PROPERTY LEASES. SCHEDULE 5.11 sets forth a list of each lease or similar agreement under which (i) the Company is lessee of, or holds or operates, any real property owned by any third Person (the "LEASED REAL PROPERTY") or (ii) the Company is lessor of any of the Owned Real Property. Except as set forth in such Schedule, the Company has the right to quiet enjoyment of all the real property described in such Schedule of which it is the Lessee for the full term of each such lease or similar agreement (and any related renewal option) relating thereto, and the leasehold or other interest of the Company in such real property is not subject or subordinate to any Encumbrance except for Permitted Encumbrances. Complete and correct copies of any instruments evidencing Encumbrances, commitments for the issuance of title insurance, title opinions, surveys and appraisals in the possession of the Company or any policies of title insurance currently in force and in the possession of the Company with respect to each such parcel of leased property have heretofore been delivered to Parent. 5.12. CONDEMNATION. Neither the whole nor any part of the Owned Real Property or any real property leased, used or occupied by the Company is subject to any pending suit for condemnation or other taking by any public authority or other Person, and, to the best knowledge of the Company, no such condemnation or other taking is threatened or contemplated. -24- 30 5.13. PERSONAL PROPERTY. SCHEDULE 5.13 contains a detailed list of all machinery, equipment, vehicles, furniture and other personal property owned by the Company having an original cost of $1,000 or more. 5.14. PERSONAL PROPERTY LEASES. SCHEDULE 5.14 contains a brief description of each lease or other agreement or right, whether written or oral (including in each case the annual rental, the expiration date thereof and a brief description of the property covered), under which the Company is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third Person, except for any such lease, agreement or right that is terminable by the Company without penalty or payment on notice of 30 days or less, or which involves the payment by the Company of rentals of less than $1,000 per year. 5.15. INTELLECTUAL PROPERTY; SOFTWARE. (a) SCHEDULE 5.15 contains a list and description (showing in each case any product, device, process, service, business or publication covered thereby, the registered or other owner, expiration date and number, if any) of all intellectual property owned by, licensed to, or used by the Company in the conduct of the Company's business ("INTELLECTUAL PROPERTY"). The Intellectual Property includes: (i) all United States and foreign patents, patent applications, continuations, continuations-in-part, divisions, reissues, patent disclosures, inventions (whether or not patentable) or improvements thereto ("PATENT RIGHTS"); (ii) all United States, state and foreign trademarks, service marks, logos, trade dress and trade names (including all assumed or fictitious names under which the Company is conducting its business or has within the previous five years conducted its business), whether registered or unregistered, and pending applications to register the foregoing ("TRADEMARKS"); (iii) all United States and foreign copyrights, whether registered or unregistered and pending applications to register the same ("COPYRIGHTS"); and (iv) all confidential ideas, trade secrets, know-how, concepts, methods, processes, formulae, reports, data, customer lists, mailing lists, business plans, or other proprietary information ("TRADE SECRETS"). (b) SCHEDULE 5.15 contains a list and description (showing in each case any owner, licensor or licensee) of all computer software programs and software systems owned by, licensed to, or used by the Company in the conduct of the Company's business, including, without limitation, all databases, compilations, tool sets, compilers, higher level or proprietary languages, related documentation and materials, whether in source code, object code or human readable form ("SOFTWARE"); PROVIDED, HOWEVER, that SCHEDULE 5.15 may omit Software licensed to Licensee that is available in consumer -25- 31 retail stores and subject to license agreements that become effective when the purchaser breaks the Software package. (c) SCHEDULE 5.15 contains a list and description of all agreements, commitments, contracts, understandings, licenses, sublicenses, assignments and indemnities which relate or pertain to any Intellectual Property or Software identified in SECTIONS 5.15(a) and 5.15(b) above or to disclosure or use of ideas or information of the Company or third Persons to which the Company is a party, showing in each case the parties thereto and the material terms thereof. (d) Except as disclosed on SCHEDULE 5.15, the Company either: (i) owns the entire right, title and interest in and to the Intellectual Property and Software, free and clear of any Encumbrance; or (ii) has the perpetual, royalty-free right to use the same. (e) Except as disclosed on SCHEDULE 5.15, the Company is not in breach of any material provision of any material agreement, commitment, contract, understanding, license, sublicense, assignment or indemnity which relates to any of the Intellectual Property or Software, and the Company has not taken any action which would impair or otherwise adversely effect its rights in any of the Intellectual Property or Software. The Company has all right, power and authority with respect to the Intellectual Property, Software and materials identified in SECTION 5.15(c), to execute and deliver this Agreement and the Company Ancillary Agreements, to consummate the transactions contemplated hereby and thereby and to comply with or fulfill the terms, conditions or provisions hereof or thereof. The transactions contemplated by this Agreement and the Company Ancillary Agreements shall have no adverse effect on the validity and enforceability of any of the Intellectual Property, Software or materials identified in SECTION 5.15(c), and the Company's right, title and interest thereto immediately after the Effective Time shall be identical to that of the Company immediately prior to the Effective Time. (f) Except as disclosed on SCHEDULE 5.15: (i) all Patent Rights and registrations for Intellectual Property identified as being owned by the Company are valid and in force, and all applications to register any unregistered Intellectual Property are pending and in good standing, all without challenge of any kind; (ii) the Intellectual Property owned by the Company is valid and enforceable; and (iii) the Company has the sole and exclusive right to bring actions for infringement or unauthorized use of the Intellectual Property and Software owned by the Company, and to the best knowledge of the Company, there is no basis for any such action. Correct and complete copies of: (x) registrations for all registered copyrights, trademarks, trade names, service marks and patents identified as being owned by the Company; (y) all pending applications to register unregistered Intellectual Property (together with any subsequent correspondence or filings relating to the foregoing); and (z) all items identified in SECTION 5.15(c), have heretofore been delivered by the Company to Parent. (g) Except as disclosed in SCHEDULE 5.15, no infringement of any copyright, trademark, service mark, trade name, patent, patent right, trade secret or other property right of any other Person has occurred or results in any way from the operations of the -26- 32 Company's business. No claim of any infringement of any copyright, trademark, service mark, trade name, patent, patent right, trade secret or other property right of any other Person has been made or asserted in respect of the operations of the Company's Business. The Company has not had notice of, or knowledge of any basis for, a claim against the Company that its operations, activities, products, software, equipment, machinery or processes of the Company's business infringe any copyright, trademark, service mark, trade name, patent, patent right, trade secret or other property right of any other Person. (h) Except as disclosed on SCHEDULE 5.15: (i) the Software is not subject to any transfer, assignment, site, equipment, or other operational limitations; (ii) the Company has maintained and protected the Software it owns (the "OWNED SOFTWARE") (including, without limitation, all source code and system specifications) with appropriate proprietary notices (including, without limitation, the notice of copyright in accordance with the requirements of 17 U.S.C. sec. 401), confidentiality and non-disclosure agreements and such other measures as are necessary to protect the proprietary, trade secret or confidential information contained therein; (iii) the Owned Software has been registered or is eligible for protection and registration under applicable copyright law and has not been forfeited to the public domain; (iv) the Company has copies of all releases or separate versions of the Owned Software so that the same may be subject to registration in the United States Copyright Office; (v) the Company has complete and exclusive right, title and interest in and to the Owned Software; (vi) the Company has developed the Owned Software through its own efforts and for its own account without the aid or use of any consultants, agents, independent contractors or Persons (other than Persons that are employees of the Company); (vii) the Owned Software does not infringe any copyright, trademark, service mark, trade name, patent, patent right, trade secret or other property right of any other Person; (viii) any Owned Software includes the source code, system documentation, statements of principles of operation and schematics, as well as any pertinent commentary, explanation, program (including compilers), workbenches, tools, and higher level or proprietary language used for the development, maintenance, implementation and use thereof, so that a trained computer programmer could develop, maintain, support, compile and use all releases or separate versions of the same that are currently subject to maintenance obligations by the Company; (ix) there are no agreements or arrangements in effect with respect to the marketing, distribution, licensing or promotion of the Owned Software by any other Person; (x) the Owned Software complies with all applicable Requirements of Laws relating to the export or reexport of the same; and (xi) the Owned Software may be exported or reexported to all countries without the necessity of any license, other than to those countries specified as prohibited destinations pursuant to applicable regulations of the U.S. Department of Commerce and/or the United States State Department. (i) Except as disclosed on SCHEDULE 5.15, all employees, agents, consultants, or contractors who have contributed to or participated in the creation or development of any copyrightable, patentable or trade secret material on behalf of the Company or any predecessor in interest thereto either: (i) is a party to a "work-for-hire" agreement under which the Company is deemed to be the original owner/author of all property rights therein; or (ii) has executed an assignment or an agreement to assign in -27- 33 favor of the Company (or such predecessor in interest, as applicable) of all right, title and interest in such material. 5.16. TITLE TO PROPERTY. The Company has good and marketable title in fee simple absolute to all Owned Real Property and to all buildings, structures and other improvements thereon, in each case free and clear of all Encumbrances, except for Permitted Encumbrances and except as set forth in SCHEDULE 5.16. The Company has good title to all of its other assets reflected on the Balance Sheet as being owned by it and all of the assets thereafter acquired by it (except to the extent that such assets have been disposed of after the Balance Sheet Date in the ordinary course of business consistent with past practice), free and clear of all Encumbrances, except for Permitted Encumbrances and except as set forth in SCHEDULE 5.16. Except as set forth on SCHEDULE 5.16, the Company has fulfilled and performed in all material respects all its obligations, and all obligations binding upon any Owned Real Property, under each of the Encumbrances to which any Owned Real Property is subject, and neither the Company nor any Owned Real Property is in breach or default under, or in violation of or noncompliance with, any such Encumbrances, and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a breach, default, violation or noncompliance. The consummation of the transactions contemplated by this Agreement will not result in any breach, default, violation, noncompliance or forfeiture or impairment of any rights under any Encumbrance to which any Owned Real Property is subject, or require any consent, approval or act of, or the making of any filing with, any other party to or benefited by or holding rights under or with respect to any such Encumbrance. 5.17. EMPLOYEE BENEFIT PLANS. (a) Set forth in SCHEDULE 5.17(A) is a true and complete list of each "employee pension benefit plan" (as such term is defined in SECTION 3(2) of ERISA) maintained by the Company or an ERISA Affiliate, or with respect to which the Company or an ERISA Affiliate is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company or an ERISA Affiliate due to such employment (the "PENSION PLANS"). Set forth in SCHEDULE 5.17(A) is a true and complete list of each "employee welfare benefit plan" (as such term is defined in SECTION 3(1) of ERISA) maintained by the Company, or with respect to which the Company is or will be required to make any payment, or which provides or will provide benefits to present or prior employees of the Company due to such employment (the "WELFARE PLANS") (the Pension Plans and Welfare Plans being the "ERISA BENEFIT PLANS"). In addition, set forth in SCHEDULE 5.17(A) is a true and complete list of each other "employee pension benefit plan" (as such term is defined in SECTION 3(2) of ERISA) that is or has ever been subject to SECTION 302 of ERISA and (i) maintained by the Company or an ERISA Affiliate at any time during the six-year period prior to the Effective Time, or (ii) with respect to which the Company or an ERISA Affiliate was required to make any payment at any time during such period (the "PRIOR PENSION PLANS"). -28- 34 (b) Other than those listed in SCHEDULE 5.17(A), set forth in Schedule 5.17(B) is a true and complete list of each of the following to which the Company is a party or with respect to which it is or will be required to make any payment (the "NON-ERISA COMMITMENTS"): (i) each retirement, savings, profit sharing, deferred compensation, severance, stock ownership, stock purchase, stock option, performance, bonus, incentive, vacation or holiday pay, hospitalization or other medical, disability, life or other insurance, or other welfare, benefit or fringe benefit plan, policy, trust, understanding or arrangement of any kind, whether written or oral; and (ii) each employee collective bargaining agreement and each agreement, understanding or arrangement of any kind, whether written or oral, with or for the benefit of any present or prior officer, director, employee, agent or consultant (including, without limitation, each employment, compensation, deferred compensation, severance or consulting agreement or arrangement, confidentiality agreement, covenant not to compete and any agreement or arrangement associated with a change in ownership or control of the Company, but excluding employment agreements terminable by the Company without premium or penalty on notice of thirty (30) days or less under which the only monetary obligation of the Company is to make current wage or salary payments and provide current fringe benefits). The Company has delivered to Parent correct and complete copies of (i) all written Non-ERISA Commitments and (ii) all insurance and annuity policies and contracts and other documents relevant to any Non-ERISA Commitment. SCHEDULE 5.17(B) contains a complete and accurate description of all oral Non-ERISA Commitments. Except as disclosed in SCHEDULE 5.17(A) or SCHEDULE 5.17(B), none of the ERISA Benefit Plans or the Non-ERISA Commitments is subject to the law of any jurisdiction outside of the United States of America. (c) Except as set forth on SCHEDULE 5.17(C), neither the Company nor any ERISA Affiliate is a party to or is bound by any "multiemployer plan" (as such term is defined in SECTION 3(37) OF ERISA). The Company has delivered to Parent with respect to each ERISA Benefit Plan and with respect to each Prior Pension Plan, other than any ERISA Benefit Plan or Prior Pension Plan which is a multiemployer plan (as such term is defined in SECTION 3(37) of ERISA), correct and complete copies, where applicable, of (i) all plan documents and amendments thereto, trust agreements and amendments thereto and insurance and annuity contracts and policies, (ii) the current summary plan description, (iii) the Annual Reports (Form 5500 series) and accompanying schedules, as filed, for the most recently completed three plan years for which such reports have been filed, (iv) the financial statements for the most recently completed three plan years for which such statements have been prepared, (v) the actuarial reports for the most recently begun three plan years for which such reports exist, (vi) the most recent determination letter issued by the IRS and the application submitted with respect to -29- 35 such letter, (vii) PBGC Form 1 for the most recently begun plan year and (H) all correspondence with the IRS, Department of Labor and Pension Benefit Guaranty Corporation concerning any controversy. Each report described in clause (v) of the preceding sentence accurately describes the funded status of the plan to which it relates and subsequent to the date of such report there has been no adverse change in the funding status or financial condition of such plan. The Company has no Pension Plans that are "multiemployer plans" (the "MULTIEMPLOYER PLANS"). (d) The Company has no Pension Plans that are subject to SECTION 302 of ERISA. Each Pension Plan which is intended to qualify under SECTION 401(a) of the Code either (x) has been determined to be so qualified by the IRS, (y) may rely on an opinion letter issued to a prototype plan sponsor with respect to a standardized plan adopted by the Company in accordance with the requirements for such reliance, or (z) has applied to the IRS for such a determination letter (or has time remaining to apply for such a determination letter) prior to the expiration of the remedial amendment period under SECTION 401(b) of the Code under applicable Treasury Regulations or IRS pronouncements, and no circumstance has occurred or exists which might cause such plan to cease being so qualified. (e) There is no pending or, to the best knowledge of the Company, threatened claim in respect of any of the ERISA Benefit Plans other than claims for benefits in the ordinary course of business. Except as set forth in SCHEDULE 5.17(E), each of the ERISA Benefit Plans other than any Multiemployer Plans (i) has been administered in all material respects in accordance with its terms and (ii) complies in form, and has been administered in all material respects in accordance, with the requirements of ERISA and, where applicable, the Code. The Company and each ERISA Affiliate has complied all material respects with the health care continuation requirements of Part 6 of Title I of ERISA and Sections 4980B through 4980D of the Code. Except as set forth in SCHEDULE 5.17(E), the Company has no obligation under any ERISA Benefit Plans or otherwise to provide health or other welfare benefits to any prior employees or any other person, except as required by Part 6 of Title I of ERISA. The consummation of the transaction contemplated by this Agreement will not result in an increase in the amount of compensation or benefits or accelerate the vesting or timing of payment of any compensation or benefits payable to or in respect of any participant. The Company is in compliance with the requirements of the Workers Adjustment and Retraining Notification Act ("WARN") and has no liabilities pursuant to WARN. (f) Except as to Multiemployer Plans (as to which this representation and warranty is made only to the best knowledge of the Company), neither the Company nor, to the best knowledge of the Company, any other "disqualified person" (within the meaning of SECTION 4975 of the Code) or "party in interest" (within the meaning of SECTION 3(14) of ERISA) has taken any action with respect to any ERISA Benefit Plan which could subject any such plan (or its related trust) or the Company or any officer, director or employee of any of the foregoing to the penalty or tax under SECTION 502(i) or SECTION 502(l) of ERISA or SECTION 4975 of the Code. -30- 36 (g) The Company has no potential liability, whether direct or indirect, contingent or otherwise, under SECTION 4063, 4064, 4069, 4204 or 4212(c) of ERISA. (h) SCHEDULE 5.17(l) contains: (i) a list of all employees or commission salespersons of the Company as of June 30, 2000; (ii) the then current annual compensation of, and a description of the fringe benefits (other than those generally available to employees of the Company) provided by the Company to any such employees or commission salespersons; and (iii) a list of all present or former employees or commission salespersons of the Company who have terminated or given notice of their intention to terminate their relationship with the Company since January 1, 2000. (i) For purposes of this Agreement, "ERISA AFFILIATE" means (i) any corporation which at any time on or before the Effective Time is or was a member of the same controlled group of corporations (within the meaning of SECTION 414(b) of the Code) as the Company; (ii) any partnership, trade or business (whether or not incorporated) which at any time on or before the Effective Time is or was under common control (within meaning of SECTION 414(c) of the Code) with the Company; and (iii) any entity which at any time on or before the Effective Time is or was a member of the same affiliated service group (within the meaning of SECTION 414(m) of the Code) as either the Company, any corporation described in clause (i) of this paragraph or any partnership, trade or business described in clause (ii) of this paragraph. An "ASSOCIATE" of any Person means (i) a corporation or organization of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Person or any of its parents or subsidiaries. (j) Except as set forth in SCHEDULE 5.17(K), (i) to the best knowledge of the Company and each of the Stockholders, the Company is not involved in any transaction or other situation with any employee, officer, director or Affiliate of the Company which may be generally characterized as a "conflict of interest", including, but not limited to, direct or indirect interests in the business of competitors, suppliers or customers of the Company, and (ii) there are no transactions with respect to the Company which involved or involves (A) the use of any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (B) the making of any direct or indirect unlawful payments to government officials or others from corporate funds or the establishment or maintenance of any unlawful or unrecorded funds, (C) the violation of any of the provisions of The Foreign Corrupt Practices Act of 1977, or any rules or regulations promulgated thereunder, (D) the receipt of any illegal discounts or rebates or any other violation of the antitrust laws or (E) any investigation by the Securities and Exchange Commission or any other federal, foreign, state or local government agency or authority. -31- 37 5.18. EMPLOYEE RELATIONS. The Company has complied in all material respects with all applicable federal, state and local laws, rules and regulations which relate to prices, wages, hours, employment and/or discrimination in employment and collective bargaining and to the operation of its business and is not liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. The Company believes that the Company's relations with its employees are satisfactory. Except as set forth in SCHEDULE 5.17(B), the Company is not a party to any collective bargaining agreement, the Company has complied in all material respects with all collective bargaining agreements listed in such Schedule and the Company is not a party to, and it is not affected by or threatened with, any dispute or controversy with a union or with respect to unionization or collective bargaining involving its employees. The Company is not materially affected by any dispute or controversy with a union or with respect to unionization or collective bargaining involving any supplier or customer of the Company. SCHEDULE 5.18 sets forth a description of any union organizing or election activities involving any non-union employees of the Company which have occurred since the Balance Sheet Date or, to the best knowledge of the Company, are threatened as of the date hereof. 5.19. CONTRACTS; PRODUCT WARRANTIES. Except as set forth in SCHEDULE 5.19 or any other Schedule hereto, the Company is not a party to or bound by: (i) any contract for the purchase, sale or lease of real property; (ii) any contract for the purchase of raw materials which the Company reasonably anticipates will involve the payment of more than $10,000 in 2000 or which extends beyond December 31, 2000; (iii) any contract for the sale of goods or services which the Company reasonably anticipates will involve the payment of more than $10,000 in 2000 or which extends beyond December 31, 2000; (iv) any consignment, distributor, dealer, manufacturers representative, sales agency, advertising representative or advertising or public relations contract which involved the payment of more than $10,000 in 1999, which the Company reasonably anticipates will involve the payment of more than $10,000 in 2000 or which extends beyond December 31, 2000; (v) any guarantee of the obligations or liabilities of customers, suppliers, officers, directors, employees, Affiliates of the Company or others; (vi) any agreement which provides for, or relates to, the incurrence by the Company of debt for borrowed money or the extension of credit (other than in the ordinary course of business consistent with past practice) by the Company to any other Person; -32- 38 (vii) any agreement or understanding with a third Person that restricts the Company from carrying on its business anywhere in the world; (viii) any contract which provides for, or relates to, any non-competition or confidentiality arrangement with any Person, including any current or former officer or employee of the Company; (ix) except as set forth in the budgets included in SCHEDULE 5.25, any contract or group of related contracts for capital expenditures in excess of $50,000 for any single project or related series of projects; (x) any partnership, joint venture or other similar arrangement or agreement involving a sharing of profits or losses; (xi) any contract which involves payments or receipts by the Company of more than $50,000; (xii) any contract not made in the ordinary course; or (xiii) any contract for any purpose (whether or not made in the ordinary course of the business or otherwise not required to be listed or described in SCHEDULE 5.19) which is material to the Company or its business. SCHEDULE 5.19 also contains a list and description of each express warranty given or offered by the Company prior to the date hereof covering any class or group of products sold or distributed by the Company and other express warranties covering any material product sold or distributed by the Company, in each case which warranty is in effect on the date hereof or will be in effect on the Effective Date. The reserve for liabilities with respect to warranty claims contained in the Balance Sheet fairly reflects in all material respects the amount required in accordance with generally accepted accounting principles to be shown thereon as of the Balance Sheet Date and the reserve for such liabilities to be contained in the books and records of the Company on the Effective Date will fairly reflect in all material respects the amount required in accordance with generally accepted accounting principles to be shown thereon as of the Effective Date. 5.20. STATUS OF CONTRACTS. Except as set forth in the Schedules attached hereto, each of the leases, contracts and other agreements listed in SCHEDULES 5.11, 5.14, 5.15, 5.17 and 5.19 (collectively, the "COMPANY AGREEMENTS") constitutes a valid and binding obligation of the parties thereto and is in full force and effect and (except as set forth in SCHEDULE 5.3 and except for those Company Agreements which by their terms will expire prior to the Effective Time or are otherwise terminated prior to the Effective Time in accordance with the provisions hereof) will continue in full force and effect after the Effective Time, in each case without breaching the terms thereof or resulting in the forfeiture or impairment of any rights thereunder and without the consent, approval or act of, or the making of any filing with, any other party. The -33- 39 Company has fulfilled and performed in all material respects its obligations under each of the Company Agreements, and the Company is not in, or alleged to be in, breach or default under, nor is there or is there alleged to be any basis for termination of, any of the Company Agreements and, to the best knowledge of the Company, no other party to any of the Company Agreements has breached or defaulted thereunder, and no event has occurred and no condition or state of facts exists which, with the passage of time or the giving of notice or both, would constitute such a default or breach by the Company or, to the best knowledge of the Company, by any such other party. The Company is not currently renegotiating any of the Company Agreements or paying liquidated damages in lieu of performance thereunder. None of the Company Agreements contains terms unduly burdensome to the Company or is harmful to its business. Complete and correct copies of each of the Company Agreements have heretofore been delivered to Parent. 5.21. NO VIOLATION, LITIGATION OR REGULATORY ACTION. Except as set forth in SCHEDULE 5.21: (i) the Company's assets and their uses comply with all applicable Requirements of Laws and Court Orders; (ii) the Company has complied with all Requirements of Laws and Court Orders which are applicable to the Company's assets or its business; (iii) there are no lawsuits, claims, suits, proceedings or investigations pending or, to the best knowledge of the Company or the Shareholder Representative, threatened against or affecting the Company or its assets or business nor, to the best knowledge of the Company, is there any basis for any of the same, and there are no lawsuits, suits or proceedings pending in which the Company is the plaintiff or claimant; (iv) there is no action, suit or proceeding pending or, to the best knowledge of the Company, threatened which questions the legality or propriety of the transactions contemplated by this Agreement; and (v) to the best knowledge of the Company, no United States federal or state legislative or regulatory proposal has been adopted or is pending which could adversely affect the Company's business in any material respect. The Company and its officers and directors are fully insured for those matters set forth on SCHEDULE 5.21. 5.22. ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 5.22: -34- 40 (i) the Company's past and present operations of the Company's business have complied and are in compliance with all applicable Environmental Laws; (ii) the Company obtained all environmental, health and safety Governmental Permits necessary for the operation of its business, and all such Governmental Permits are in good standing and the Company is in compliance with all terms and conditions of such permits; (iii) (A) none of the Company, nor any of the Company Properties or its past or present operations, is subject to any on-going investigation by, order from or agreement with any Person (including without limitation any prior owner or operator of any Company Property) respecting (x) any Environmental Law, (y) any Remedial Action or (z) any claim of Losses and Expenses arising from the Release or threatened Release of a Contaminant into the environment and (B) there is not any Release of any Contaminant on, to, at or under any Company Property; (iv) the Company is not subject to any judicial or administrative proceeding, order, judgment, decree or settlement alleging or addressing a violation of or liability under any Environmental Law; (v) the Company has not: 1. reported a Release of a hazardous substance pursuant to SECTION 103(a) of CERCLA, or any state equivalent; 2. filed a notice pursuant to SECTION 103(c) of CERCLA; 3. filed notice pursuant to SECTION 3010 of RCRA, indicating the generation of any hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent; or 4. filed any notice under any applicable Environmental Law reporting a substantial violation of any applicable Environmental Law; (vi) there is not now, nor to the best knowledge of the Company has there ever been, on or in any Company Property: 1. any treatment, recycling, storage or disposal of any hazardous waste, as that term is defined under 40 CFR Part 261 or any state equivalent that requires or required a Governmental Permit pursuant to SECTION 3005 of RCRA; or 2. any underground storage tank or surface impoundment or landfill or waste pile. -35- 41 (vii) to the best knowledge of the Company, there is not now on or in any Company Property any polychlorinated biphenyls (PCB) used in pigments, hydraulic oils, electrical transformers or other equipment; (viii) the Company has not received any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of a Contaminant into the environment on any Company Property or generated by the Company; (ix) no Company Property has been listed or, to the best knowledge of the Company, proposed for listing on the National Priorities List pursuant to CERCLA, on the Comprehensive Environmental Response, Compensation and Liability Information System List or any state list of sites requiring Remedial Action; (x) the Company has not sent or arranged for the transport of any Contaminant to any site listed on the National Priorities List pursuant to CERCLA or that otherwise could give rise to liability on the part of the Company for Remedial Action, Losses or Expenses; (xi) no Environmental Encumbrance has attached to any Company Property; (xii) to the best knowledge of the Company, any asbestos-containing material which is on or part of any Company Property (excluding any raw materials used in the manufacture of products or products themselves) is in good repair according to the current standards and practices governing such material, and its presence or condition does not violate any currently applicable Environmental Law; and (xiii) none of the products that the Company manufactures, distributes or sells in connection with its business, now or in the past, contains asbestos or asbestos-containing material. 5.23. INSURANCE. The Company maintains policies of fire and casualty, liability (general, products and other liability), workers' compensation and other forms of insurance and bonds in such amounts and against such risks and losses as are insured against by companies engaged in the same or a similar business. SCHEDULE 5.23 sets forth a list and brief description (including nature of coverage, limits, deductibles, premiums and the loss experience for the most recent five years with respect to each type of coverage) of all policies of insurance maintained, owned or held by the Company during the period from January 1, 1999 up to and including on the date hereof. The Company shall keep or cause such insurance or comparable insurance in full force and effect through the Effective Date. The Company has complied with each of such insurance policies and has not failed to give any notice or present any claim thereunder in a due and timely manner. Except as disclosed in SCHEDULE 5.23, the full policy limits (subject to deductibles provided in such policies) are available and -36- 42 unimpaired under each such policy and to the best knowledge of the Company, no insurer under any of such policies has a basis to void such policy on grounds of non-disclosure on the part of the policyholder or the insured thereunder. Each of such policies is in full force and effect and will not in any way be affected by or terminate or lapse by reason of the transactions contemplated by this Agreement. The Company has delivered to Parent correct and complete copies of the most recent inspection reports, if any, received from insurance underwriters as to the condition of the Company's assets. 5.24. CUSTOMERS AND SUPPLIERS. Set forth in SCHEDULE 5.24 hereto is (i) a list of names and addresses of the ten largest customers and the ten largest suppliers (measured by dollar volume of purchases or sales in each case) of the Company and the percentage of the Company's business which each such customer or supplier represents or represented during 1999 and the period January 1, 2000 through June 30, 2000; and (ii) copies of the forms of purchase order for inventory and other supplies and sales contracts for finished goods used by the Company. Except as set forth in SCHEDULE 5.24, there exists no actual or, to the best knowledge of the Company, threatened termination, cancellation or limitation of, or any modification or change in, the business relationship of the Company with any customer or group of customers listed in SCHEDULE 5.24, or whose purchases individually or in the aggregate are material to the operations of the Company's business, or with any supplier or group of suppliers listed in SCHEDULE 5.24, or whose sales individually or in the aggregate are material to the operations of the Company's business, and there exists no present or future condition or state of facts or circumstances involving customers, suppliers or sales representatives which the Company can now reasonably foresee would materially adversely affect the Company's business or prevent the conduct of such business after the consummation of the transactions contemplated by this Agreement in essentially the same manner in which it has heretofore been conducted. 5.25. BUDGETS. SCHEDULE 5.25 sets forth (a) as of the date hereof the budgets of capital, payroll and other expenditures of the Company prepared in the ordinary course of its business for the fiscal year ending December 31, 2000 and (b) the total capital expenditures through June 30, 2000, if any, for each capital expenditure project for which funds are proposed to be expended during 2000. 5.26. CONSENT MATERIALS. The materials (collectively, the "CONSENT MATERIALS") to be prepared by the Company in accordance with SECTION 7.1 and used in connection with obtaining approval by the Shareholders of the Merger, this Agreement and the transaction contemplated hereby (the "SHAREHOLDER CONSENT") will, when prepared by the Company and distributed to the Shareholders, comply in all material respects with the provisions of the WBCA and will not, at the time of the mailing of the Consent Materials, at the time the Company obtains Shareholder Consent or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading; PROVIDED, that the Company makes no representation with respect to information concerning Parent supplied by Parent to the Company for inclusion in the Consent Materials. -38- 43 5.27. REQUIRED VOTE OF SHAREHOLDERS. The affirmative vote of the holders of (i) a majority of the outstanding shares of Company Common Stock and (ii) two-thirds (2/3) of the outstanding shares of Preferred Stock is required to approve this Agreement. The affirmative vote of two-thirds (2/3) of the outstanding shares of Preferred Stock is required to effect the automatic conversion of all of the shares of Preferred Stock into Common Stock. No other vote of the Shareholders is required by law, the Company's Articles of Incorporation or Bylaws or otherwise in order for the Company to consummate the Merger and the transactions contemplated by this Agreement. 5.28. NO FINDER. Neither the Company nor any Person acting on behalf of the Company has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement, other than to H & Q, whose fees and expenses will be deducted from the Purchase Price. Complete and correct copies of the engagement and indemnification agreements entered into with H & Q have been furnished to Parent. 5.29. ULTIMATE PARENT ENTITY. The Company is the only "ultimate parent entity" (as defined in 16 C.F.R. Sec. 801.1(a)(3) (1999)) of the Company. The "person" (as defined in 16 C.F.R. Sec. 801.1(a)(1) (1999)) of which the Company is the "ultimate parent entity" does not have "annual net sales" (as defined in 16 C.F.R. Sec. 801.11 (1999)) or "total assets" (as defined in 16 C.F.R. Sec. 801.11 (1999)) of $10 million or more. 5.30. DISCLOSURE. None of the representations or warranties of the Company and the Shareholders Representative contained herein and none of the information contained in the Schedules referred to in this ARTICLE V or in the opinion referred to SECTION 9.11 is false or misleading in any material respect or omits to state a fact herein or therein necessary to make the statements herein or therein not misleading in any material respect. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO As an inducement to the Company and the Shareholder Representative to enter into this Agreement and to consummate the transactions contemplated hereby, Parent and Mergerco hereby jointly and severally represent and warrant to the Company and the Shareholder Representative and agree as follows: 6.1. ORGANIZATION AND CAPITAL STRUCTURE. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to own or lease and to operate and use its properties and assets and to carry on its business as now conducted. Mergerco is a corporation duly organized and validly existing under the laws of the State of Washington. Mergerco was organized solely for the purpose of engaging in the transactions contemplated by this Agreement and has not engaged in any business since it was incorporated which is not in connection with this Agreement. -39- 44 The authorized capital of Mergerco consists of 1,000 share of Company Common Stock, par value $.01 per share, of which 1,000 have been issued and are outstanding and none are held as treasury shares. All of the outstanding shares of capital stock of Mergerco are validly issued, fully paid and nonassessable and owned of record and beneficially by Parent, free from all Encumbrances. 6.2. AUTHORITY. Parent has full corporate power and authority to execute, deliver and perform this Agreement and all of the Parent Ancillary Agreements. The execution, delivery and performance of this Agreement and the Parent Ancillary Agreements by Parent have been duly authorized, approved and adopted by Parent's board of directors and, except for the approval of this Agreement by Parent as the sole shareholder of Mergerco in accordance with SECTION 7.2, no other corporate proceedings on the part of Parent are necessary to authorize this Agreement, the Parent Ancillary Agreements and the transactions contemplated hereby and thereby. This Agreement has been duly authorized, executed and delivered by Parent and is the legal, valid and binding obligation of Parent enforceable in accordance with its terms and each of the Parent Ancillary Agreements has been duly authorized by Parent and upon execution and delivery by Parent will be a legal, valid and binding obligation of Parent enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). Mergerco has full corporate power and authority to execute, deliver and perform this Agreement. The execution, delivery and performance of this Agreement by Mergerco have been duly authorized, approved and adopted by Mergerco's board of directors and, except for the approval of this Agreement by Parent in accordance with SECTION 7.2 and the filing contemplated by SECTION 4.2, no other corporate proceedings on the part of Mergerco are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by Mergerco and is the legal, valid and binding agreement of Mergerco enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). Neither the execution and delivery of this Agreement or any of the Parent Ancillary Agreements or the consummation of any of the transactions contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will: (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance -40- 45 upon any of Parent's or Mergerco's assets under, (1) the Certificate of Incorporation of Parent, the Articles of Incorporation of Mergerco, or the Bylaws of Parent or Mergerco, (2) any material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which either Parent or Mergerco is a party or any of their respective assets or business is subject or by which either Parent or Mergerco is bound, (3) any Court Order to which either Parent or Mergerco is a party or by which either Parent or Mergerco is bound or (4) any Requirements of Laws affecting Parent or Mergerco, except for, in the case of clauses (2) or (3) of this subparagraph (ii), any such conflicts, breaches, defaults, rights or Encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole, materially impair the ability of Parent to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby; or (ii) require the approval, consent, authorization or act of, or the making by either Parent or Mergerco of any declaration, filing or registration with, any Person, except for the filing contemplated by SECTION 4.2. 6.3. INFORMATION SUPPLIED BY PARENT FOR CONSENT MATERIALS. None of the information supplied by Parent in writing for inclusion in the Consent Materials will, at the time of the mailing of the Consent Materials, at the time of the Shareholder Meeting or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. 6.4. NO FINDER. Neither Mergerco or Parent nor any Person acting on behalf of Mergerco or Parent has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. ARTICLE VII ACTION PRIOR TO THE EFFECTIVE TIME The respective parties hereto covenant and agree to take the following actions between the date hereof and the Effective Time: 7.1. ACTION BY THE COMPANY; SHAREHOLDER MEETING AND PREPARATION OF THE CONSENT MATERIALS. (a) The Company shall prepare the Consent Materials as promptly as possible after the date hereof and shall submit the proposed Consent Materials to Parent and its counsel not less than five days prior to submitting the Consent Materials -41- 46 to the Shareholders. Parent shall furnish the Company with such information concerning Parent as shall be required to be included in the Consent Materials. The Company shall use commercially reasonable best efforts to mail the Consent Materials to Shareholders on or before August 4, 2000. If prior to the Effective Time either (i) the Company determines that the Consent Materials need to be amended or supplemented in order for the representation and warranty of the Company in SECTION 5.26 to be correct or (ii) Parent determines that the Consent Materials need to be amended or supplemented in order for the representation and warranty of Parent and Mergerco in SECTION 6.3 to be correct, the Company or Parent, as the case may be, shall notify the other of such determination and shall deliver to the other such amendment or supplement as such party believes is necessary to make such representation and warranty correct. The Company shall consider all such amendments proposed by Parent, and shall cause all such amendments or supplements that the parties reasonably believe are necessary to be mailed to the Shareholders as soon as practicable after such delivery. (b) The Company shall properly obtain from the Shareholders (1) approval of the Merger and this Agreement and (2) in the case of the Preferred Stock Holders, the necessary approval to effect the automatic conversion, immediately prior to the consummation of the Merger, of all of the shares of Preferred Stock into shares of Company Common Stock. The Company will, through its Board of Directors, recommend to the Shareholders the approval of this Agreement as required by (i) the Articles of Incorporation and Bylaws of the Company (including the approval and adoption by the Preferred Stock Holders) and (ii) the WBCA. The Company shall use commercially reasonable best efforts to obtain such approvals on or before August 25, 2000. 7.2. ACTION BY PARENT. Parent, as the sole shareholder of Mergerco, shall take such actions as may be necessary to approve the Merger and this Agreement as required by the WBCA. 7.3. INVESTIGATION OF THE COMPANY BY PARENT. The Company shall afford to the officers, employees and authorized representatives of Parent (including, without limitation, its independent public accountants, attorneys, environmental consultants and financial advisors) complete access during normal business hours to the offices, properties, employees and business and financial records (including, without limitation, computer files, retrieval programs and similar documentation) of the Company to the extent Parent shall deem necessary or desirable, and shall furnish to Parent or its authorized representatives such additional information concerning the operations, properties and business of the Company as may be reasonably requested to enable Parent or its representatives to verify the accuracy of the representations and warranties contained in this Agreement, to verify that the covenants of the Company and the Shareholder Representative contained in this Agreement have been complied with and to determine whether the conditions set forth in ARTICLE IX have been satisfied. Parent agrees that such investigation shall be conducted in such a manner as not to interfere unreasonably with the operations of the Company. Without limiting the foregoing, the Company shall permit Parent, or its representatives, to conduct an -42- 47 environmental audit of any of the Owned Real Property or the Leased Real Property with respect to any environmental health and safety issues deemed material by Parent. No investigation made by Parent or its representatives hereunder shall affect the representations and warranties of the Shareholder Representative hereunder. 7.4. PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the parties hereto shall refrain from taking any action which would render any representation or warranty contained in ARTICLE V or VI of this Agreement inaccurate as of the Effective Time. Each party shall promptly notify the other parties of any action, suit or proceeding that shall be instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any transaction contemplated by this Agreement. The Company shall promptly notify Parent of any lawsuit, claim, proceeding or investigation that may be instituted or threatened against the Company which would have been listed in SCHEDULE 5.22 if such lawsuit, claim, proceeding or investigation had arisen prior to the date hereof. 7.5. CONSENTS OF THIRD PARTIES; GOVERNMENTAL APPROVALS. (a) The Company will act diligently and reasonably to secure, before the Effective Time, the consent, approval or waiver, in form and substance reasonably satisfactory to Parent, from any party to any Company Agreement required to satisfy the conditions set forth in SECTION 9.5; PROVIDED that no party hereto shall have any obligation to offer or pay any consideration in order to obtain any such consents or approvals; and PROVIDED, FURTHER, that the Company shall not make any agreement or understanding affecting the Company or its assets or business as a condition for obtaining any such consents or waivers except with the prior written consent of Parent. During the period prior to the Effective Time, Parent shall act diligently and reasonably to cooperate with the Company to obtain the consents, approvals and waivers contemplated by this SECTION 7.5(a). (b) During the period prior to the Effective Time, the parties hereto shall act diligently and reasonably, and shall cooperate with each other, to secure any consents and approvals of any Governmental Body required to be obtained by them in order to permit the consummation of the transactions contemplated by this Agreement or to otherwise satisfy the conditions set forth in SECTION 9.4; PROVIDED that the Company shall not make any agreement or understanding affecting the Company or its assets or business as a condition for obtaining any such consents or approvals except with the prior written consent of Parent. 7.6. CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME. (a) Except as expressly contemplated by this Agreement, the Company shall carry on its business in, and not enter into any material transaction other than in accordance with, the ordinary course consistent with past practice and, to the extent consistent therewith, use its reasonable best efforts to preserve intact its current business organization, keep available the services of its current officers and preserve its relationships with customers, suppliers and others having business dealings with it (except, in each case, -43- 48 with the prior written consent of Parent). Without limiting the generality of the foregoing, and except as expressly contemplated by this Agreement, the Company shall not, without the prior written consent of Parent: (i) (A) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to its Shareholders in their capacity as such, (B) split, combine or reclassify any of its capital stock or issue, sell or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock (other than any issuances of its securities upon the exercise of any outstanding options to purchase such securities or upon the conversion of any outstanding convertible securities that are convertible into such securities) or (C) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any other securities thereof; (ii) except as set forth in clause (i) above, issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock or other securities (including, without limitation, any rights, warrants or options to acquire any shares of its capital stock or other securities); (iii) amend its Articles of Incorporation or Bylaws; (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; (v) incur or assume any indebtedness for borrowed money, enter into (as lessee) any capitalized lease obligation, guarantee any such indebtedness or obligation, issue or sell any debt securities, guarantee any debt securities of others or make any loans, advances or capital contributions to, or investments in, any other Person, except the incurrence and/or guarantee of indebtedness to fund working capital; (vi) make or incur any new capital expenditure or expenditures which, individually, is in excess of $50,000 or, in the aggregate, are in excess of $200,000; (vii) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction thereof in the ordinary course of business consistent with past practice; (viii) alter through merger, liquidation, reorganization, restructuring or in any other fashion its corporate structure; -44- 49 (ix) enter into or adopt, or amend, any bonus, incentive, deferred compensation, insurance, medical, hospital, disability or severance plan, agreement or arrangement or enter into or amend any employee benefit plan or employment, consulting or management agreement, other than any such amendment to an employee benefit plan that is made to maintain the qualified status of such plan or its continued compliance with applicable law; (x) make any change in accounting practices or policies applied in the preparation of the financial statements referred to in SECTION 5.4, except as required by generally accepted accounting principles; (xi) modify any of the agreements, understandings, obligations, commitments, indebtedness or other obligations set forth in any of the Schedules to this Agreement, enter into any agreement, understanding, obligation or commitment, or incur any indebtedness or obligation, of the type that would have been required to be listed on SCHEDULE 5.19 if in existence on the date hereof, or enter into any contract which requires any approval or consent by any other Person to the transactions contemplated by this Agreement; (xii) pay or commit to pay any bonus to any officer or employee of the Company or make any other material change in the compensation of its employees; (xiii) make any change in its business or operations or make any expenditure which shall exceed the amount, as set forth in SCHEDULE 5.25, budgeted therefor; (xiv) make any capital expenditure or enter into any contract or commitment therefor, other than capital expenditures or commitments for capital expenditures referred to in the applicable budget contained in SCHEDULE 5.25; (xv) enter into any contract for the purchase of real property or for the sale of any Owned Real Property or exercise any option to purchase real property listed in SCHEDULE 5.10 or any option to extend a lease listed in SCHEDULE 5.11; (xvi) sell, lease (as lessor), transfer or otherwise dispose of, or mortgage or pledge, or impose or suffer to be imposed any Encumbrance on, any of the Company's assets, other than inventory and minor amounts of personal property sold or otherwise disposed of for fair value in the ordinary course of the Company's business consistent with past practice and other than Permitted Encumbrances; -45- 50 (xvii) cancel any debts owed to or claims held by the Company (including the settlement of any claims or litigation) other than in the ordinary course of the Company's business consistent with past practice; (xviii) accelerate or delay collection of any notes or accounts receivable in advance of or beyond their regular due dates or the dates when the same would have been collected in the ordinary course of its business consistent with past practice; (xix) delay or accelerate payment of any account payable or other liability beyond or in advance of its due date or the date when such liability would have been paid in the ordinary course of its business consistent with past practice; (xx) allow the levels of raw materials, supplies, work-in-process or other materials included in its inventory to vary in any material respect from the levels customarily maintained in its business; (xxi) enter into any transaction with Affiliates, other than on an arms' length basis; (xxii) prepare or file any Tax Return inconsistent with past practice or, on any such Tax Return, take any position, make any election, or adopt any method that is inconsistent with positions taken, elections made or methods used in preparing or filing similar Tax Returns in prior periods (including, without limitation, positions, elections or methods which would have the effect of deferring income to periods after the Closing Date or accelerating deductions to periods prior to the Closing Date); (xxiii) take any material action in respect of the intellectual property rights of the Company, including in respect of patents or patent applications, except in the ordinary course of business; or (xxiv) enter into any other transaction affecting the business of the Company, other than in the ordinary course of business consistent with past practice or as expressly contemplated by this Agreement. 7.7. NOTIFICATION BY THE COMPANY OF CERTAIN MATTERS. During the period prior to the Effective Time, the Company shall promptly advise Parent in writing of (i) any change of event having a Material Adverse Effect on the Company, (ii) any notice or other communication from any third Person alleging that the consent of such third Person is or may be required in connection with the transactions contemplated by this Agreement, and (iii) any material default under any Company Agreement or event which, with notice or lapse of time or both, would become such a default on or prior to the Effective Time and of which the Company has knowledge. -46- 51 7.8. MUTUAL COOPERATION; REASONABLE BEST EFFORTS. The parties hereto shall cooperate with each other, and shall use their respective reasonable best efforts to cause as promptly as possible the fulfillment of the conditions to each other party's obligations hereunder, including without limitation SECTIONS 9.3 and 10.2, and to obtain as promptly as possible all consents, authorizations, orders or approvals from each and every third party, whether private or governmental, required in connection with the transactions contemplated by this Agreement; PROVIDED, HOWEVER, that the foregoing shall not require Parent or the Company to make any divestiture or consent to any divestiture in order to obtain any consent, authorization or fulfill any condition or approval. 7.9. COMPANY STOCK OPTIONS. (a) Prior to the Effective Time, the Company shall terminate the 1995 Stock Option Plan and the 1999 Stock Option Plan and any other stock-based incentive plan or arrangement providing for compensation or consideration wholly or partially in the form of shares of Company Common Stock or any other capital stock of the Company (collectively, the "STOCK OPTION PLANS"), and shall grant no additional options, awards or rights ("COMPANY STOCK OPTIONS") under such Stock Option Plans on or after the date of this Agreement, except such options, awards or rights that the Company has, prior to the date of this Agreement agreed to grant or proposed to grant (subject to approval by the Company's Board of Directors) in connection with the commencement of an individual's employment with the Company or in connection with an employee's promotion to a new position, all of which are set forth on SCHEDULE 7.9. SCHEDULE 7.9 identifies each Company Stock Option as of the date of this Agreement, the Stock Option Plan pursuant to which such Company Stock Option was granted, the holder of such Company Stock Option, the number of shares subject to such Company Stock Option, the current exercise price of such Company Stock Option and whether such Company Stock Option is an incentive stock option under Section 422 of the Code. (b) The Company shall take all actions necessary or appropriate to cause all Company Stock Options that are, or as a result of the transactions contemplated by this Agreement become, outstanding, vested and exercisable immediately prior to the Effective Time to be exercised, effective immediately prior to the Effective Time and contingent on the Closing of the Merger, in accordance with their terms and the individual agreements and plans governing such Company Stock Options. The holder of any Company Stock Option (each an "OPTION HOLDER") that is partially or fully vested and is not exercised as of the Effective Time will be entitled to receive, in consideration thereof, for each share of Company Common Stock subject to the vested portion of the Company Stock Option, an amount in cash equal to the excess, if any, of the Merger Consideration over the exercise price per share of Company Common Stock subject thereto. The amounts payable pursuant to this SECTION 7.9(b) shall be paid as soon as reasonably practicable following the Closing Date without interest thereon and shall be subject to and made net of all applicable withholding taxes. Upon receipt of such payment in respect of the vested portion of any Company Stock Option, such vested portion of the Company Stock Option shall be cancelled. The receipt by the Option Holder of the consideration contemplated by this SECTION 7.9(b) shall be deemed a release of any and all rights the Option Holder thereof had or may have had in respect -47- 52 of the applicable Company Stock Option with respect to the vested portion of such Company Stock Option. (c) At the Effective Time, the unvested portion of each Company Stock Option that is outstanding immediately subsequent to the Effective Time shall become and represent an option to purchase the number of shares of common stock ("PARENT COMMON STOCK") of Parent under Parent's stock option plan (a "SUBSTITUTE OPTION") determined by dividing (i) the number of shares of Company Common Stock subject to the unvested portion of such Company Stock Option immediately prior to the Effective Time by (ii) the Exchange Ratio (as defined in SECTION 7.9(e), at an exercise price per share of Parent Common Stock (rounded up to the nearest cent), equal to the exercise price per share of Company Common Stock immediately prior to the Effective Time multiplied by the Exchange Ratio. Any fractional shares of Parent Common Stock resulting from the formula described in the foregoing sentence shall be rounded down to the nearest whole number. It is the intention of the parties that the above formula shall be applied in a manner consistent with Section 424(a) of the Code. Parent will grant incentive stock options to acquire Parent Common Stock as Substitute Options for incentive stock options to acquire Company Common Stock and grant nonqualified stock options to acquire Parent Common Stock as Substitute Options for nonqualified stock options to acquire Company Common Stock. After the Effective Time, each Substitute Option shall be subject to the terms and conditions of the Parent's stock option plan and standard terms and conditions of options granted thereunder, except that each Substitute Option shall provide that: (i) upon the first anniversary of the Closing Date such option shall be vested and exercisable for one-half (1/2) of the shares of Parent Common Stock subject to such Substitute Option as of the Closing Date; (ii) upon the second anniversary of the Closing Date such option shall be vested and exercisable for three-fourths (3/4) of the shares of Parent Common Stock subject to such Substitute Option as of the Closing Date; and (iii) upon the third anniversary of the Closing Date such option shall be fully vested and exercisable for all of the shares of Parent Common Stock subject to such Substitute Option as of the Closing Date. Notwithstanding the foregoing, Parent may take any action or make any amendment to the Substitute Options as Parent deems necessary or advisable so that the Substitute Options comply with the requirements of Section 424(a) of the Code. (d) The Company (i) shall take all action necessary to implement the provisions of this SECTION 7.9, including amending the agreements representing the outstanding stock option awards under the 1999 Stock Option Plan pursuant to resolution by the Company's Board of Directors in form and substance satisfactory to Parent and obtaining the written consent of each Option Holder of a 1999 Company Stock Option to such amendments in form and substance satisfactory to Parent, and (ii) shall provide Parent with duly executed copies of such amendments and consents prior to the Effective Time. Prior to the Effective Time, the Company shall use its best efforts to obtain any other necessary consents or releases from the Option Holders and to take any such other lawful action as may be necessary or appropriate to give effect to this SECTION 7.9. -48- 53 (e) For purposes of this SECTION 7.9, the "Exchange Ratio" shall be determined by dividing the Per Share Parent Price by the Per Share Company Price. The "Per Share Parent Price" shall be the average per share closing price for Parent Common Stock as listed on the New York Stock Exchange for the 10 trading days immediately prior to the Closing Date and the "Per Share Company Price" shall be the Fully Diluted Per Share Price. 7.10. STATE TAKEOVER LAWS. If any "fair price," "business combination" or "control share acquisition" statute or other similar statute or regulation shall become applicable to the transactions contemplated hereby, Parent, Mergerco and the Company and the respective Boards of Directors of Mergerco and the Company shall use their best efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and otherwise act to minimize the effects of any such statute or regulation on the transactions contemplated hereby. 7.11. TERMINATION OF COMPANY 401(k) PLAN. The Company shall terminate the Company's 401(k) Plan prior to the Effective Date and shall deliver to Parent a written resolution, in form and substance acceptable to Parent, effecting such termination on or before the Effective Date. ARTICLE VIII ADDITIONAL AGREEMENTS 8.1. EMPLOYEE BENEFITS. In the event that employees of the Company become eligible to participate in any of Parent's employee benefit plans or programs in accordance with the terms and conditions of the applicable Parent benefit plans and programs and applicable law, such employees shall receive credit for their length of service with the Company for purposes of eligibility and vesting under Parent's employee benefit plans and programs, including, without limitation, employee pension and welfare benefit plans ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO The obligations of Parent and Mergerco under this Agreement shall, at the option of Parent and Mergerco, be subject to the satisfaction, on or prior to the Effective Time, of the following conditions: 9.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. (a) There shall have been no material breach by the Company or the Shareholder Representative in the performance of any of their respective covenants and agreements herein; none of the representations or warranties of the Company or -49- 54 the Shareholder Representative contained or referred to herein shall be untrue or incorrect in any respect at the Effective Time and such representations and warranties shall be true and correct as though made at the Effective Time, except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by Parent and Mergerco or any transaction permitted by SECTION 7.6; and there shall have been delivered to Parent and Mergerco a certificate or certificates to such effect, dated the Effective Date and signed on behalf of the Company by the President or any Vice President of the Company and by the Shareholder Representative. (b) There shall have been no material breach by any Significant Shareholder in the performance of any of its covenants and agreements contained in the applicable Voting Agreement; none of the representations or warranties of such Significant Shareholder contained or referred to in the applicable Voting Agreement shall be untrue or incorrect in any respect at the Effective Time and such representations and warranties shall be true and correct as though made at the Effective Time; and there shall have been delivered to Parent and Mergerco a certificate or certificates to such effect, dated the Effective Date and signed on by such Significant Shareholder. 9.2. NO CHANGES OR DESTRUCTION OF PROPERTY. Between the date hereof and the Effective Time, there shall have been (a) no change or event having a Material Adverse Effect on the Company; (b) no material adverse federal or state legislative or regulatory change affecting the Company's business or its products or services; and (c) no material damage to the Company's assets by fire, flood, casualty, act of God or the public enemy or other cause, regardless of insurance coverage for such damage; and there shall have been delivered to Parent and Mergerco a certificate or certificates to such effect, dated the Effective Date and signed on behalf of the Company by the President or any Vice President of the Company and on behalf of the Shareholder Representative by the President or any Vice President of the Shareholder Representative. 9.3. NO RESTRAINT OR INJUNCTION. No temporary restraining order, preliminary or permanent injunction or other order issued by a court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect. 9.4. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all approvals and actions of or by all Governmental Bodies which are necessary to consummate the transactions contemplated hereby, which are either specified in SCHEDULE 5.3 or otherwise required to be obtained prior to the Closing by applicable Requirements of Laws or which are necessary to prevent a Material Adverse Effect on the Company. 9.5. NECESSARY CONSENTS. The Company or the Shareholder Representative shall have received consents, in form and substance reasonably satisfactory to Mergerco and Parent, to the transactions contemplated hereby from the other parties to all contracts, leases, agreements and permits to which the Company is a party or by -50- 55 which the Company or any of its assets is affected and which are specified in SCHEDULE 9.5 or are otherwise necessary to prevent a Material Adverse Effect on the Company. 9.6. SHAREHOLDER APPROVAL AND CONVERSION OF PREFERRED STOCK. (a) This Agreement shall have been duly approved by the requisite votes of the Shareholders in accordance with the WBCA and the Articles of Incorporation and Bylaws of the Company, including the approval by the Preferred Stock Holders. (b) The Preferred Stock Holders shall have taken such action as is necessary under the Articles of Incorporation and Bylaws of the Company and the WBCA to effect the automatic conversion, immediately prior to the consummation of the Merger, of all shares of Preferred Stock into shares of Company Common Stock in accordance with the terms and subject to the conditions of the Articles of Incorporation of the Company. 9.7. DISSENTERS' RIGHTS. Holders of not more than 5% of the outstanding shares of Company capital stock shall have properly exercised and not revoked their rights to dissent to the Merger under Chapter 23B.13 of the WBCA. 9.8. EFFECTIVE AGREEMENTS. Each of the Foster Employment Agreement, the Employment Agreements, the Non-Competition Agreements, the Foster Non-Competition Agreement, the Escrow Agreement and the Voting Agreements shall be in full force and effect. 9.9. OTHER CONVERTIBLE SECURITIES. In addition to the Preferred Stock, any other outstanding securities, options, warrants or other rights to purchase that are convertible into or exercisable for Company Common Stock or any other capital stock of the Company shall have been fully converted or exercised for Company Common Stock or cancelled, and thereafter no holder of any such instrument shall any rights to acquire any equity security of the Company, the Surviving Corporation or Parent. 9.10. AGREEMENT WITH WIDEBAND. The Company shall have entered into a License Agreement with Wideband Semiconductor, Inc. on terms and conditions reasonably satisfactory to Parent, and such agreement shall be in full force and effect. 9.11. OPINION OF INTELLECTUAL PROPERTY COUNSEL. The Company shall have received an opinion from Fulbright & Jaworski, its intellectual property counsel, substantially in the form of the opinion issued to the Company by Fulbright & Joworski dated June 16, 2000. -51- 56 ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY The obligations of the Company under this Agreement shall, at the option of the Company, be subject to the satisfaction, on or prior to the Effective Time, of the following conditions: 10.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There shall have been no material breach by Parent or Mergerco in the performance of any of their respective covenants and agreements herein; none of the representations or warranties of Parent or Mergerco contained or referred to herein shall be untrue or incorrect in any respect at the Effective Time and such representations and warranties shall be true and correct at the Effective Time as though made at the Effective Time, except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by the Company and the Shareholder Representative; and there shall have been delivered to the Company and the Shareholder Representative a certificate or certificates to such effect, dated the Effective Date and signed on behalf of Parent by the President or any Vice President of Parent and on behalf of Mergerco by the President or any Vice President of Mergerco. 10.2. NO RESTRAINT OR INJUNCTION. No temporary restraining order, preliminary or permanent injunction or other order issued by a court of competent jurisdiction of other legal restraint or prohibition preventing the consummation of the Merger shall be in effect. 10.3. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all approvals and actions of or by all Governmental Bodies necessary to consummate the transactions contemplated hereby, which are required to be obtained prior to the Closing by applicable Requirements of Laws. 10.4. SHAREHOLDER APPROVAL. This Agreement shall have been duly approved by the requisite vote of the Shareholders in accordance with the WBCA and the Articles of Incorporation and Bylaws of the Company; PROVIDED, HOWEVER, that this condition shall not be effective if its failure is primarily the result of the Company's failure to perform its obligations under SECTION 7.1. 10.5. EFFECTIVE AGREEMENTS. The Escrow Agreement shall be in full force and effect. ARTICLE XI TERMINATION 11.1. TERMINATION RIGHTS. Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Effective Time: -52- 57 (a) by the mutual consent of all of the parties hereto; (b) by any party if the Effective Time shall not have occurred on or before September 30, 2000 (or such later date as may be mutually agreed to by all of the parties hereto); (c) by Parent in the event of any material breach by the Shareholder Representative or the Company of any of their respective agreements, representations or warranties contained herein and the failure of the Shareholder Representative or the Company to cure, within seven days after receipt of notice from Parent requesting that such breach be cured; or (d) by the Company in the event of any material breach by Parent or Mergerco of any of their respective agreements, representations or warranties contained herein and the failure of Parent to cure such breach, or cause Mergerco to cure such breach, within seven days after receipt of notice from the Company requesting that such breach be cured. 11.2. NOTICE OF TERMINATION. Any party desiring to terminate this Agreement pursuant to SECTION 11.1 shall give notice of such termination to each of the other parties to this Agreement. 11.3. EFFECT OF TERMINATION. In the event that this Agreement shall be terminated pursuant to this ARTICLE XI, all further obligations of the parties under this Agreement (other than SECTIONS 12.2 and 12.9) shall be terminated without further liability of any party to the others; PROVIDED, HOWEVER, that nothing herein shall relieve any party from liability for its willful breach of this Agreement. ARTICLE XII GENERAL PROVISIONS 12.1. SURVIVAL OF OBLIGATIONS. All representations, warranties, covenants and obligations contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement. 12.2. CONFIDENTIAL NATURE OF INFORMATION. Each party agrees that it will treat in confidence all documents, materials and other information which it shall have obtained regarding the other parties during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the date of this Agreement), the investigation provided for herein and the preparation of this Agreement and other related documents, and, in the event the transactions contemplated hereby shall not be consummated, each party will return to the other parties all copies of nonpublic documents and materials which have been furnished in connection therewith. Such documents, materials and information shall not be communicated to any third Person (other than, in the case of Parent and Mergerco, to their counsel, accountants, financial advisors or lenders, and, in the case of the Company and the Shareholder Representative, to their counsel, accountants or -53- 58 financial advisors). No other party shall use any confidential information in any manner whatsoever except solely for the purpose of evaluating the proposed Merger; PROVIDED, HOWEVER, that after the Effective Time, Parent and the Surviving Corporation may use or disclose any confidential information included in the assets of the Company as of the Effective Time or otherwise reasonably related to the assets or business of the Company. The obligation of each party to treat such documents, materials and other information in confidence shall not apply to any information which (i) is or becomes available to such party from a source other than such party, (ii) is or becomes available to the public other than as a result of disclosure by such party or its agents, (iii) is required to be disclosed under applicable law or judicial process, but only to the extent it must be disclosed, or (iv) such party reasonably deems necessary to disclose to obtain any of the consents or approvals contemplated hereby. 12.3. NO PUBLIC ANNOUNCEMENT. No party hereto shall, without the approval of all of the other parties, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such party shall be so obligated by law or the rules of any stock exchange, in which case such party shall so advise the other parties and all parties shall use their reasonable best efforts to cause a mutually agreeable release or announcement to be issued; PROVIDED that the foregoing shall not preclude communications or disclosures necessary to implement the provisions of this Agreement or to comply with accounting and Securities and Exchange Commission disclosure obligations. 12.4. NOTICES. All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered when delivered personally or four days after being mailed by registered or certified mail, return receipt requested, or one day after being sent by private overnight courier addressed as follows: (a) If to the Company (after the Effective Time), Parent or Mergerco, to: Harris Corporation 1025 West NASA Blvd. Melbourne, FL 32919 Attention: Richard Ballantyne with a copy to: Harris Corporation -54- 59 330 Twin Dolphin Drive Redwood Shores, CA 94065 Attention: Samuel Wyman and: Sidley & Austin Bank One Plaza 10 South Dearborn Street Chicago, IL 60603 Attention: David Zampa (b) If to the Company (prior to the Effective Time) or the Shareholder Representative, to: Wavtrace, Inc. 1575 132nd Avenue NE Bellevue, WA 98005 Attention: President and Chief Financial Officer with a copy to: Venture Law Group 4750 Carillon Point Kirkland, WA 98033 Attention: Craig Sherman or to such other address as such party may indicate by a notice delivered to the other parties hereto. 12.5. SUCCESSORS AND ASSIGNS; SHAREHOLDER REPRESENTATIVE. (a) The rights of each party under this Agreement shall not be assignable by such party prior to the Effective Time without the written consent of each of the other parties, except that the rights of Parent hereunder may be assigned prior to the Effective time, without the consent of any other party hereto, to any corporation all of the outstanding capital stock of which is owned or controlled by Parent or to any general or limited partnership in which Parent or any such corporation is a general partner; PROVIDED that (i) the assignee shall assume in writing all of Parent's obligations hereunder, (ii) Parent shall not be released from any of its obligations hereunder by reason of such assignment and (iii) the obligations of the Company and the Shareholder Representative under this Agreement shall be subject to the delivery by such assignee, on or prior to the Effective Time, of a certificate signed on its behalf containing representations and warranties similar to those made by Parent in ARTICLE VI. Following -55- 60 the Effective Time, any party may assign any of its rights hereunder, but no such assignment shall relieve it of its obligations hereunder. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. The successors and permitted assigns hereunder shall include without limitation, in the case of Parent, any permitted assignee as well as the successors in interest to such permitted assignee (whether by merger, liquidation (including successive mergers or liquidations) or otherwise). Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any Person other than the parties and successors and assigns permitted by this SECTION 12.5 any right, remedy or claim under or by reason of this Agreement. (c) Prior to the Effective Date, the Shareholder Representative may resign at any time by giving 30 days' notice to Parent and the Company; PROVIDED, HOWEVER, that such resignation shall not be effective unless and until a successor Shareholder Representative has been appointed and accepts such position and the terms hereof and of the Escrow Agreement. In such event, Parent and the Company shall appoint a successor Shareholder Representative or, if Parent and the Company are unable to agree upon a successor Shareholder Representative within 30 days after such notice, the Shareholder Representative shall be entitled to appoint its own successor; PROVIDED, HOWEVER, that such successor shall be a Person that satisfies the requirements for a successor Escrow Agent under the Escrow Agreement. Prior to the Effective Date, if the Shareholder Representative dies or is otherwise unable to perform its obligations under this Agreement and would be unable to perform its obligations under the Escrow Agreement after the Effective Date or, in the case of a successor Shareholder Representative that is not a natural Person, becomes bankrupt, insolvent or ceases to exist, then Parent and the Company shall appoint a successor Shareholder Representative or, if Parent and the Company are unable to agree upon a successor Shareholder Representative within 30 days after such event, the successor Shareholder Representative shall be selected by lot from two Persons that satisfy the requirements for a successor Escrow Agent under the Escrow Agreement, one selected by Parent and one selected by the Shareholder Representative. After the Effective Date, the Shareholder Representative may resign at any time by giving 30 days' notice to Parent and the Company; PROVIDED, HOWEVER, that such resignation shall not be effective unless and until a successor Shareholder Representative has been appointed and accepts such position and the terms hereof and of the Escrow Agreement. In such event, Parent and the Shareholder Representative shall appoint a successor Shareholder Representative or, if Parent and the Shareholder Representative are unable to agree upon a successor Shareholder Representative within 30 days after such notice, the successor Shareholder Representative shall be selected by lot from two Persons that satisfy the requirements for a successor Escrow Agent under the Escrow Agreement, one selected by Parent and one selected by the Shareholder Representative. After the Effective Date, if the Shareholder Representative dies or is otherwise unable to perform its obligations under this Agreement or the Escrow Agreement or, in the case of a successor Shareholder Representative that is not a natural Person, becomes bankrupt, -56- 61 insolvent or ceases to exist, then the successor Shareholder Representative shall be selected by lot from three Persons that satisfy the requirements for a successor Escrow Agent under the Escrow Agreement. 12.6. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Exhibits and Schedules referred to herein, the Voting Agreements and the documents delivered pursuant hereto or thereto contain the entire understanding of the parties hereto and thereto with regard to the subject matter contained herein or therein, and supersede all prior agreements, understandings or letters of intent between or among any of the parties hereto; PROVIDED, that notwithstanding anything herein to the contrary, the parties acknowledge and agree that Section 14 of the Letter Agreement shall remain in full force and effect and shall remain binding upon the parties thereto. This Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the parties hereto. 12.7. INTERPRETATION. Titles to articles and headings to sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. The Schedules and Exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein. Except as expressly stated to the contrary herein, all dollar amounts in this Agreement refer to lawful money of the United States of America. 12.8. WAIVERS. Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to any party, it is authorized in writing by an authorized representative of such party. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. 12.9. FEES AND EXPENSES. Except as otherwise provided in this SECTION 12.9, each of the parties hereto shall bear its own costs and expenses (including, without limitation, fees and disbursements of its counsel, accountants and other financial, legal, accounting or other advisors), incurred by it or its Affiliates in connection with the preparation, negotiation, execution, delivery and performance of this Agreement and each of the other documents and instruments executed in connection with or contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby (collectively, the "ACQUISITION EXPENSES"); PROVIDED, HOWEVER, that, except for up to $200,000 of Acquisition Expenses of the Shareholder Representative and the Company relating to the transactions contemplated by this Agreement, which $200,000 of Acquisition Expenses are attributable to and shall be borne by the Company, the Acquisition Expenses of the Shareholder Representative and the Company shall be paid out of the Escrow Amount (as defined in the Escrow Agreement) pursuant to the Escrow Agreement. -57- 62 12.10. PARTIAL INVALIDITY. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. 12.11. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties hereto and delivered to each of the other parties. 12.12. FURTHER ASSURANCES. From time to time after the Effective Time, the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of Mergerco, the Company or otherwise, such deeds and other instruments and to take or cause to be taken such further or other action as shall be necessary or desirable in order to vest or perfect in or to confirm, of record or otherwise, in the Surviving Corporation title to, and possession of, all of the property, rights, privileges, powers, immunities and franchises of Mergerco and the Company and otherwise carry out the purposes of this Agreement. 12.13. GOVERNING LAW. Except to the extent that Washington law is mandatorily applicable to the Merger and the rights and obligations of the shareholders of the Company and Mergerco, this Agreement shall be governed by and construed in accordance with the internal laws (as opposed to the conflicts of law provisions) of the State of New York. -58- 63 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written. HARRIS CORPORATION By: /s/ Phillip W. Farmer -------------------------------------- Name: Phillip W. Farmer Title: Chairman of the Board, President and Chief Executive Officer WT ACQUISITION CORP. By: /s/ Phillip W. Farmer -------------------------------------- Name: Phillip W. Farmer Title: President WAVTRACE, INC. By: /s/ Thomas T. van Overbeek -------------------------------------- Name: Thomas T. van Overbeek Title: President and Chief Executive Officer /s/ Thomas T. van Overbeek ----------------------------------------- THOMAS T. VAN OVERBEEK, AS THE SHAREHOLDER REPRESENTATIVE -59- 64 Exhibit 2.1 FIRST AMENDMENT TO AGREEMENT OF MERGER FIRST AMENDMENT TO AGREEMENT OF MERGER, dated as of August 22, 2000 (this "First Amendment"), among HARRIS CORPORATION, a Delaware corporation ("Parent"), WT ACQUISITION CORP., a Washington corporation and wholly owned subsidiary of Parent ("Mergerco"), WAVTRACE, INC., a Washington corporation (the "Company"), and THOMAS T. VAN OVERBEEK, a natural person (the "Shareholder Representative"). W I T N E S S E T H: WHEREAS, Parent, Mergerco, the Company and the Shareholder Representative have entered into the Agreement of Merger, dated as of July 28, 2000 (the "Merger Agreement"), providing for the merger of Mergerco and the Company upon the terms and subject to the conditions contained therein; and WHEREAS, Parent, Mergerco, the Company and the Shareholder Representative desire to amend the Merger Agreement in certain respects in accordance with SECTION 12.6 thereof. NOW, THEREFORE, in consideration of the premises and of the agreements herein contained, the parties hereto agree as follows: 1. The definition of "Escrow Payment" in SECTION 1.1 of the Merger Agreement is hereby amended and restated to read in its entirety as follows: "ESCROW PAYMENT" means any amount payable to the former shareholders of the Company and the holders of Unexercised Vested Options pursuant to the Escrow Agreement. 2. The definition of "Per Share Closing Payment" in SECTION 1.1 of the Merger Agreement is hereby amended and restated to read in its entirety as follows: "PER SHARE CLOSING PAYMENT" means the Closing Consideration DIVIDED BY (i) the number of shares of Company Common Stock (other than such shares held by Parent) outstanding immediately prior to the Effective Time plus (ii) the number of shares of Company Common Stock subject to Unexercised Vested Options. 3. The definition of "Per Share Escrow Payment" in SECTION 1.1 of the Merger Agreement is hereby amended and restated to read in its entirety as follows: "PER SHARE ESCROW PAYMENT" means, in respect of any Escrow Payment, the amount of such payment DIVIDED BY (i) the number of shares of Company Common Stock (other than such shares held by Parent) outstanding immediately prior to the Effective Time plus (ii) the number of shares of Company Common Stock subject to Unexercised Vested Options. 65 4. The definition of "Purchase Price" in SECTION 1.1 of the Merger Agreement is hereby amended and restated to read in its entirety as follows: "PURCHASE PRICE" means $ 175 million LESS (i) (x) the Fully Diluted Per Share Price less the weighted average of the exercise prices of the unvested options to acquire Company Common Stock multiplied by (y) the number of unvested options to acquire Company Common Stock; (ii) the Fully Diluted Per Share Price multiplied by 14,464,573 (the number of fully diluted shares of Company Common Stock held by Parent); and (iii) the dollar amount that the Company shall owe to Hambrecht & Quist LLC ("H & Q") upon consummation of the Merger pursuant to the letter agreement between the Company and H & Q dated January 24, 2000 PLUS the amount of cash, if any, received by the Company upon exercise of any of the warrants held by parties other than Parent, all as determined immediately prior to the Effective Time. 5. The following definition of "Unexercised Vested Options" is hereby added to SECTION 1.1 of the Merger Agreement: "UNEXERCISED VESTED OPTION" means a Company Stock Option that has vested (or that portion of any Company Stock Option that has vested) but has not been exercised by the Effective Time. 6. SECTION 3.3(a) of the Merger Agreement is hereby amended and restated to read in its entirety as follows: (a) EXCHANGE AGENT. On the Closing Date, Parent shall deposit with an exchange agent to be determined by Parent prior to the Closing (the "EXCHANGE AGENT"), for the benefit of the holders of shares of Company Common Stock, for exchange in accordance with this ARTICLE III, through the Exchange Agent, cash equal to the Closing Consideration less that portion of the Closing Consideration payable to the holders of Unexercised Vested Options pursuant to SECTION 7.9 (such cash, together with any earnings with respect thereto, and such certificates being hereinafter referred to as the "EXCHANGE FUND"). 7. The following provision is hereby added as SECTION 3.3(j) of the Merger Agreement: (j) UNEXERCISED VESTED OPTIONS. Unexercised Vested Options shall be treated in accordance with the procedures set forth in SECTION 7.9. 8. SECTION 7.9(b) of the Merger Agreement is hereby amended and restated to read in its entirety as follows: (b) The Company shall take all actions necessary or appropriate to cause all Company Stock Options that are, or as a result of the transactions contemplated by this Agreement become, outstanding, vested and exercisable immediately prior to the Effective Time to be exercised, effective immediately prior to the Effective Time and contingent on the Closing of the Merger, in accordance with their terms and the individual agreements and plans governing such Company Stock 2 66 Options. The holder of any Unexercised Vested Option (each an "OPTION HOLDER") will be entitled to receive, in consideration thereof, for each share of Company Common Stock subject to such Unexercised Vested Option, an amount equal to the Merger Consideration; PROVIDED, however that the Per Share Closing Payment payable to each such Option Holder (the "VESTED OPTION CLOSING PAYMENT") shall be reduced by the exercise price per share of such Company Common Stock subject to the Unexercised Vested Option held thereby. The Vested Option Closing Payment shall be paid as soon as reasonably practicable following the Closing Date without interest thereon and shall be subject to and made net of all applicable withholding taxes. Upon receipt of such payment in respect of the vested portion of any Company Stock Option, such vested portion of the Company Stock Option shall be cancelled. The receipt by the Option Holder of the consideration contemplated by this SECTION 7.9(b) shall be deemed a release of any and all rights the Option Holder thereof had or may have had in respect of the applicable Company Stock Option with respect to the vested portion of such Company Stock Option. 9. EXHIBIT B to the Merger Agreement is hereby amended and restated to read in its entirety as attached hereto as ANNEX A. 10. Capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement. 11. The Merger Agreement, as amended by this First Amendment, shall remain in full force and effect in accordance with its terms. This First Amendment may be executed in one or more counterparts. 3 67 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the date first written above. HARRIS CORPORATION By: /s/ Bryan R. Roub -------------------------------------- Name: Bryan R. Roub Title: Senior Vice President and Chief Financial Officer WT ACQUISITION CORP. By: /s/ Bryan R. Roub -------------------------------------- Name: Bryan R. Roub Title: Senior Vice President and Chief Financial Officer WAVTRACE, INC. By: /s/ Thomas T. van Overbeek -------------------------------------- Name: Thomas T. van Overbeek Title: President and Chief Executive Officer /s/ Thomas T. van Overbeek ----------------------------------------- THOMAS T. VAN OVERBEEK, as the Shareholder Representative 4 EX-2.2 3 l83749aex2-2.txt EXHIBIT 2.2 1 EXHIBIT 2.2 INDEMNIFICATION AND ESCROW AGREEMENT DATED AS OF AUGUST 31, 2000 AMONG HARRIS CORPORATION, WAVTRACE, INC., THOMAS T. VAN OVERBEEK AND CITIBANK, N.A. 2 TABLE OF CONTENTS PAGE ---- Section 1. Definitions.................................................1 Section 2. Deposit and Use of Escrow Amount............................2 Section 3. Disposition of Escrow Amount................................2 Section 4. Delivery of Escrow Amount Upon Termination..................5 Section 5. Permitted Investments; Interest.............................6 Section 6. Liability and Compensation of Escrow Agent..................7 Section 7. Shareholder Representative.................................10 Section 8. Taxes......................................................11 Section 9. Representations and Warranties.............................11 Section 10. Indemnification Provisions and Payment of Net Worth Adjustment Amount..........................................12 Section 11. Benefit; Successor and Assigns.............................14 Section 12. Termination................................................14 Section 13. Notices....................................................14 Section 14. Governing Law..............................................15 Section 15. Dispute Resolution.........................................15 Section 16. Counterparts...............................................16 Section 17. Headings...................................................16 Section 18. Partial Invalidity.........................................16 Section 19. Entire Agreement; Modification and Waiver..................17 i 3 INDEMNIFICATION AND ESCROW AGREEMENT This INDEMNIFICATION and ESCROW AGREEMENT (this "ESCROW AGREEMENT"), is dated as of August 31, 2000, among Harris Corporation, a Delaware corporation ("PARENT"), Wavtrace, Inc., a Washington corporation (the "COMPANY"), Thomas T. van Overbeek (the "SHAREHOLDER REPRESENTATIVE") and Citibank, N.A., as indemnification and escrow agent (the "ESCROW AGENT"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company, WT Acquisition Corp., a Washington corporation ("MERGERCO"), the Shareholder Representative and Parent are parties to the Agreement of Merger, dated as of July 28, 2000 (the "MERGER AGREEMENT"), pursuant to which Mergerco shall be merged with and into the Company (the "MERGER"), with the Company surviving as a wholly owned subsidiary of Parent (as such, the "SURVIVING CORPORATION"); WHEREAS, as a condition to their entering into the Merger Agreement, Parent and Mergerco are being indemnified, held harmless and reimbursed pursuant to the conditions set forth herein; WHEREAS, to ensure that funds will be available to indemnify, hold harmless and reimburse Parent Group Members (as defined herein), on the Closing Date, the Parent shall deposit an amount in U.S. dollars equal to the Escrow Amount (as defined in the Merger Agreement) with the Escrow Agent in an escrow account established pursuant to this Escrow Agreement to be held and subsequently disbursed in accordance with the express terms of this Escrow Agreement; WHEREAS, the Merger Agreement provides for the Shareholder Representative to act in accordance herewith in connection with this Escrow Agreement; and WHEREAS, the Escrow Agent has been appointed by Parent and the Shareholder Representative and has agreed to hold the Escrow Amount pursuant to the express terms of this Escrow Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto agree as follows: Section 1. DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings set forth in the Merger Agreement. As used herein: "EXPENSES" shall mean any and all expenses incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against hereunder (including, without limitation, court filing fees, court costs, arbitration fees or costs, witness fees and reasonable fees and -1- 4 disbursements of legal counsel, investigators, expert witnesses, consultants, accountants and other professionals). "LOSSES" shall mean any and all losses, costs, obligations, liabilities, settlement payments, payments with respect to Taxes, awards, judgments, fines, penalties, damages, expenses, deficiencies or other charges. "PARENT GROUP MEMBER" shall mean the Surviving Corporation, Parent, or any of their respective Affiliates and their respective successors and assigns. "PERMITTED INVESTMENT" shall mean any or any combination of the following: (i) readily marketable obligations maturing within six (6) months after the date of acquisition thereof issued by the United States of America or any agency or instrumentality thereof; (ii) readily marketable obligations maturing within six (6) months after the date of acquisition thereof issued by any state or municipality within the United States of America, or any political subdivision, agency or instrumentality thereof, rated "A" or better by either Standard & Poor's Corporation or Moody's Investors Service Inc.; (iii) readily marketable commercial paper maturing within one hundred eighty (180) days after the date of issuance thereof which has the highest credit rating of either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (iv) six (6) month certificates of deposit issued by any bank incorporated and doing business pursuant to the laws of the United States of America or any state thereof having combined capital and surplus of at least $500,000,000 or (v) money market funds (including, but not limited to, Goldman, Sachs FS Prime Obligations Fund Service Class (464)). "SHAREHOLDERS" shall mean the holders of shares of Company Common Stock and the holders of Unexercised Vested Options who have the right to receive any Per Share Escrow Payments pursuant to the Merger Agreement. Section 2. DEPOSIT AND USE OF ESCROW AMOUNT. (a) On the Closing Date, Parent shall deposit the Escrow Amount with the Escrow Agent. (b) Promptly after receipt from Parent of the Escrow Amount, the Escrow Agent shall confirm to Parent and the Shareholder Representative such receipt in writing. (c) The Escrow Agent agrees to hold and disburse the Escrow Amount solely as instructed in writing by Parent and/or the Shareholder Representative (as set forth herein) and to act as Escrow Agent only in accordance with the terms, conditions and provisions of this Escrow Agreement. Section 3. DISPOSITION OF ESCROW AMOUNT. (a) Each Parent Group Member shall be entitled to receive payment directly from the Escrow Agent out of the Escrow Amount in the amount specified which, at any time and from time to time, such Parent Group Member is entitled to be indemnified, -2- 5 reimbursed and held harmless from the Escrow Amount as provided in SECTION 10 hereof, in each case in accordance with the following provisions. (i) If any Parent Group Member wishes to make a claim (a "CLAIM") for indemnification pursuant to SECTION 10 hereof, to be satisfied from the Escrow Amount, such Parent Group Member (individually or collectively, the "CLAIMING PARTY") shall so notify the Escrow Agent in writing (the "CLAIM NOTICE") of the facts giving rise to such claim for indemnification hereunder. Such Claim Notice shall describe in reasonable detail (to the extent then known or determinable) each individual Loss or Expense that the Claiming Party has paid or reasonably anticipates that it will have to pay, the date each such Loss or Expense was paid or incurred (or the basis for such anticipated Loss or Expense), the nature of the misrepresentation, breach or warranty or claim to which such Loss or Expense related and the method of calculating such Loss or Expense. If the Claiming Party is not the Surviving Corporation or Parent, the Claim Notice must be accompanied by a certificate from the Surviving Corporation or Parent confirming that the Claiming Party is a Parent Group Member. At the time of delivery of any Claim Notice to the Escrow Agent, a duplicate copy of such Claim Notice shall be delivered by the Claiming Party to the Shareholder Representative. The Claim Notice shall be accompanied by a certificate of the Claiming Party attesting to the Claiming Party's contemporaneous delivery of a duplicate copy of the Claim Notice to the Shareholder Representative. (ii) Unless the Shareholder Representative shall have delivered an Objection (as defined herein) in accordance with SECTION 3(a)(iii), the Escrow Agent shall, on the thirtieth (30th) day (or such earlier day as the Shareholder Representative shall authorize in writing to the Escrow Agent) after receipt of a Claim Notice with respect to indemnification for a specified amount, deliver the Escrow Amount as specified in the Claim Notice. (iii) Until the thirtieth (30th) day following delivery of a Claim Notice, the Shareholder Representative may deliver to the Escrow Agent a written objection (an "OBJECTION") to the claim made in such Claim Notice. At the time of delivery of any Objection to the Escrow Agent, a duplicate copy of such Objection shall be delivered to the Claiming Party and to Parent. Any such Objection shall be a notice of dispute to either the merits or the amount of the Claim or both. (iv) Upon receipt of an Objection properly made, the Escrow Agent shall (1) deliver the specified portion of the Escrow Amount equal to that portion of the amount specified in the Claim Notice, if any, which is not disputed by the Shareholder Representative and (2) designate and segregate out of the Escrow Amount a portion thereof with a value equal to the amount subject to the Claim Notice which is disputed by the Shareholder Representative. Such designated and segregated amount shall be deposited into a separate escrow sub-account designated the "Disputed Claim Account". Thereafter, the Escrow Agent shall not dispose of such segregated and disputed portion of the Escrow Amount until the Escrow Agent shall have received a certified copy of the final decision of the -3- 6 arbitrators as contemplated by SECTION 3(a)(vi), or the Escrow Agent shall have received the written agreement between the Claiming Party and the Shareholder Representative resolving such dispute and setting forth the amount, if any, which such Claiming Party is entitled to be paid. The Escrow Agent will deliver the portion of the Escrow Amount that the Claiming Party is entitled to receive as set forth in the arbitration decision after the expiration of ten (10) business days from the receipt of such decision or, in the event that the amount to which the Claiming Party is entitled is established pursuant to an agreement between the Claiming Party and the Shareholder Representative, promptly (but not later than ten (10) business days) after the Escrow Agent's receipt of such agreement. (v) The Claiming Party shall deliver a written response to the Shareholder Representative in respect of any Objection properly delivered by the Shareholder Representative. If after thirty (30) days following delivery of such response there remains a dispute as to any Claims, the Shareholder Representative and the Claiming Party shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such claims. If the Shareholder Representative and the Claiming Party so agree, a memorandum setting forth such agreement shall be prepared and signed by both and shall be furnished to the Escrow Agent and shall specify the amount to be distributed to the Claiming Party and the account (or sub-account) from which such disbursement shall be made. The Escrow Agent shall be entitled to rely conclusively and fully on any such memorandum and shall distribute upon such joint written instruction from Parent and the Shareholder Representative the specified amount from the Escrow Amount in accordance with the terms thereof or in the manner set forth herein. (vi) If no such agreement can be reached after good faith negotiation, either the Claiming Party or the Shareholder Representative may, by written notice to the other, demand arbitration of the matter unless the amount of the Loss or Expense is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties have agreed to arbitration; and in either such event the matter shall be settled by arbitration conducted in accordance with SECTION 15 hereof. The decision of the arbitrator as to the validity and amount of any disputed claim in the related Claim Notice shall be binding and conclusive and, notwithstanding anything to the contrary in this SECTION 3, the Escrow Agent shall conclusively rely on and act in accordance with such arbitrator's decision and make or withhold payments out of the Escrow Amount in accordance therewith. (b) THIRD PERSON CLAIMS. The Claiming Party shall have the right to conduct and control, through counsel of its choosing, the defense, compromise or settlement of any third Person claim, action or suit as to which indemnification will be sought by any Claiming Party pursuant to SECTION 10 hereof, and in any such case the Shareholder Representative shall cooperate in connection therewith and shall furnish such records, information and testimony and attend such conferences, discovery proceedings, hearings, trials and appeals as may be reasonably requested by the Claiming Party in -4- 7 connection therewith; PROVIDED, that the Shareholder Representative may participate, through counsel chosen by it and at its own expense, in the defense of any such claim, action or suit as to which the Claiming Party has so elected to conduct and control the defense thereof; and PROVIDED, FURTHER, that the Claiming Party shall not, without the written consent of the Shareholder Representative (which written consent shall not be unreasonably withheld), pay, compromise or settle any such claim, action or suit, except that no such consent shall be required if, following a written request from the Claiming Party, the Shareholder Representative shall fail, within thirty (30) days after the making of such request, to acknowledge and agree in writing that, if such claim, action or suit shall be adversely determined, indemnification shall be provided to such Claiming Party from the Escrow Amount pursuant hereto. (c) The Escrow Agent shall not dispose of all or any portion of the Escrow Amount other than as expressly provided in this Escrow Agreement. Section 4. DELIVERY OF ESCROW AMOUNT UPON TERMINATION. (a) On the date which is eight (8) months after the Effective Date (the "FIRST DISTRIBUTION DATE") and provided that the aggregate dollar amount of Claims that have been made up to that date do not exceed $500,000, then, upon joint written instruction from Parent and the Shareholder Representative, the Escrow Agent shall deliver to the Shareholders an amount (the "FIRST DISTRIBUTION AMOUNT") equal to one-half of the remaining Escrow Amount. On the date which is fifteen (15) months after the Effective Date (the "SECOND DISTRIBUTION DATE"), upon joint written instruction from Parent and the Shareholder Representative, the Escrow Agent shall deliver to the Shareholders an amount specified in such joint written instruction (together with the First Distribution Amount, the "DISTRIBUTION AMOUNT") equal to (A) the remaining Escrow Amount, LESS (B) any amount designated as subject to a disputed Claim pursuant to a Claim Notice to the extent such Claim has not been resolved prior to such date, LESS (C) the Escrow Agent's Compensation and any Indemnification Liability (as each is defined in SECTION 6) (to the extent Parent and the Shareholder Representative have received written statements from the Escrow Agent of such amounts pursuant to SECTION 6(d)), (D) any amounts paid by the Company for which it may be reimbursed pursuant to SECTION 6(a) hereof, and LESS (E) any Shareholder Representative's Expenses (to the extent Parent and the Escrow Agent shall then have received written notice from the Shareholder Representative to such effect in accordance with SECTION 7(c) hereof). The portion of any Distribution Amount due to any Shareholder shall be an amount (rounded to the nearest cent) equal to a fraction, the numerator of which is the total amount of the Closing Consideration attributable to such Shareholder pursuant to the Merger Agreement and the denominator of which is the total amount of the Closing Consideration. (b) Any amounts retained in escrow after the Second Distribution Date shall be held by the Escrow Agent and shall be used to indemnify Parent Group Members subject to the terms and conditions of this Escrow Agreement and upon resolution and payment out of the Escrow Amount in satisfaction of applicable pending Claims, any remaining amounts in escrow shall, upon joint written instruction from Parent and the -5- 8 Shareholder Representative, be transferred to the Shareholder Representative with respect to any Shareholder Representative's Expenses (to the extent Parent and the Escrow Agent shall then have received written notice from the Shareholder Representative to such effect in accordance with SECTION 7(c)) and to the Escrow Agent with respect to any Escrow Agent's Compensation and Indemnification Liability (to the extent Parent and the Shareholder Representative have received written statements of such amounts pursuant to SECTION 6(d)) and any remaining amounts shall be distributed to the Shareholders in accordance with SECTION 4(a). (c) Upon distribution of the entire amount of the Escrow Amount, the Escrow Agent shall give Parent and the Shareholder Representative written notice to such effect. Such notice shall be given to the address set forth in SECTION 13, or to such other address as designated pursuant thereto. Upon such distribution, this Escrow Agreement shall terminate; PROVIDED however that SECTION 6 shall survive such termination. (d) At any time prior to final termination of this Escrow Agreement as provided in SECTION 4(c), the Escrow Agent shall, if so instructed in a writing signed by Parent and the Shareholder Representative, release from the Escrow Amount to Parent the amounts SPECIFIED in such writing. Section 5. PERMITTED INVESTMENTS; INTEREST. The Escrow Agent is hereby authorized and directed to hold the Escrow Amount in a segregated escrow account and to disburse such Escrow Amount only in accordance with the express terms of this Escrow Agreement. From the date hereof until the date of disbursement of the Escrow Amount pursuant to SECTION 4, the Escrow Agent is authorized and directed to invest and reinvest any Escrow Amount in such Permitted Investments as Parent and the Shareholder Representative shall mutually agree and shall jointly instruct the Escrow Agent in writing, so long as the Escrow Amount is available for disbursement by wire transfer or certified check within ten (10) business days after the Escrow Agent is instructed and authorized to release any of the Escrow Amount pursuant to this Escrow Agreement. In the absence of such an agreement and instructions, the Escrow Agent agrees to invest and reinvest such funds in Goldman, Sachs FS Prime Obligations Fund Service Class (464), or a successor or similar fund jointly agreed to by Parent and the Shareholder Representative in writing and which is a Permitted Investment. Any interest or other earnings realized from investment of the Escrow Amounts shall be considered, and be disposed of by the Escrow Agent as part of, the Escrow Amount. For purposes of this Escrow Agreement, "interest" on the Escrow Amount shall include all proceeds thereof and investment earnings with respect thereto. The Escrow Agent shall have full power and authority to sell any investments held by it under this Escrow Agreement as necessary to make disbursements under this Escrow Agreement. The Escrow Agent, Parent and the Shareholder Representative shall not be liable or responsible for any unrealized profit or realized loss on such investments. -6- 9 Section 6. LIABILITY AND COMPENSATION OF ESCROW AGENT. (a) The Company and Parent (each an "Indemnifying Party") shall jointly and severally indemnify and hold the Escrow Agent harmless from and against any and all liability, damage, judgment, fine, penalty, claim, indemnity, settlement, cost or expense (other than the Escrow Agent's fees and out-of-pocket expenses which shall be paid pursuant to the terms of SECTION 6(d) hereof) which may arise out of any action taken, suffered or omitted by the Escrow Agent in connection with the acceptance and administration of this Escrow Agreement and in accordance with the terms of this Escrow Agreement (the "Indemnification Liability"), except such liability and expense as may result from the gross negligence or willful misconduct of the Escrow Agent. The Company shall be entitled to be reimbursed out of the Escrow Amount for all amounts that the Company is required to pay in respect of any Indemnification Liability. Subject to the foregoing, each of the Indemnifying Parties shall contribute to the Indemnification Liability in such proportion as is appropriate to reflect the relative fault of each individual Indemnifying Party. In all cases where there is no such basis for allocating contribution for such Indemnification Liability, one half of the total Indemnification Liability shall be paid out of the Escrow Amount and one half to the total Indemnification Liability shall be paid by Parent. The indemnity provided herein shall survive the termination of this Escrow Agreement and the resignation or removal of the Escrow Agent. (b) The Escrow Agent shall not be liable for any action taken, suffered or omitted or for any loss or injury resulting from its actions or its performance or lack of performance of its duties hereunder in the absence of gross negligence or willful misconduct on its part. In no event shall the Escrow Agent be liable (i) for acting in accordance with or relying upon any instruction, notice, demand, certificate or document from Parent or the Shareholder Representative or any entity acting on behalf of either such party so long as the Escrow Agent reasonably believes such instrument to be genuine and to have been signed and presented by the proper party or parties, (ii) for any indirect, consequential, punitive or special damages, regardless of the form of action and whether or not any such damages were foreseeable or contemplated, (iii) for the investment or reinvestment of any cash held by it hereunder, in each case in good faith, in accordance with the terms hereof, including without limitation any liability for delays (not resulting from its gross negligence or willful misconduct) in the investment or reinvestment of the Escrow Amount, or any loss of interest incident to such delays, (iv) for not performing any act or fulfilling any duty, obligation or responsibility hereunder by reason of any occurrence beyond the control of the Escrow Agent (including but not limited to any act or provision of any present or future law or regulation or governmental authority, any act of God or war, or the unavailability of the Federal Reserve Bank wire or facsimile or other wire or communication facility) or (v) for an amount in excess of the value of the Escrow Amount, valued as of the date of deposit. (c) The Escrow Agent shall be entitled to rely on, and shall be fully protected in acting in reliance upon, any instructions or directions furnished to it in writing signed by both Parent and the Shareholder Representative pursuant to any provision of this Escrow Agreement and shall be entitled to treat as genuine, and as the document it purports to be, any letter, paper or other document furnished to it by any Parent Group -7- 10 Member or the Shareholder Representative, and reasonably believed by the Escrow Agent to be genuine and to have been signed and presented by the proper party or parties. In performing its duties hereunder, the Escrow Agent may consult with counsel to the Escrow Agent and shall be entitled to rely on, and shall be fully protected in acting in reliance upon, the advice or opinion of such counsel. (d) The Escrow Agent shall be entitled to the fees set forth in ANNEX A hereto for the performance of services by the Escrow Agent hereunder for each year or any portion thereof that any portion of the Escrow Amount remains in escrow and shall be reimbursed for reasonable out-of-pocket expenses incurred by it (including reasonable counsel fees and expenses) in connection with the performance of such services and for the preparation and execution of this Escrow Agreement, and any amendments hereto (such fees and expenses are hereinafter referred to as the "ESCROW AGENT'S COMPENSATION"). Upon a written request delivered to the Escrow Agent by either Parent or the Shareholder Representative, or both, the Escrow Agent shall render statements to Parent and the Shareholder Representative setting forth in detail the Escrow Agent's Compensation and the basis upon which the Escrow Agent's Compensation was computed. The Escrow Agent's Compensation shall be paid out of the Escrow Amount in accordance with SECTION 4(a) hereof. (e) The Escrow Agent may resign at any time by giving sixty (60) days written notice to Parent and the Shareholder Representative; PROVIDED that such resignation shall not be effective unless and until a successor Escrow Agent has been appointed and accepts such position pursuant to the terms of this SECTION 6. In such event, Parent and the Shareholder Representative shall appoint a successor Escrow Agent or, if Parent and the Shareholder Representative are unable to agree upon a successor Escrow Agent within sixty (60) days after such notice, the Escrow Agent shall be entitled to appoint its own successor, provided that such successor is a national banking association having combined capital and surplus of at least $100,000,000. Such appointment, whether by Parent and the Shareholder Representative, on the one hand, or the Escrow Agent, on the other hand, shall be effective on the effective date of the aforesaid resignation (the "ESCROW TRANSFER DATE"). On the Escrow Transfer Date, all right, title and interest to the Escrow Amount, including interest thereon, shall be transferred to the successor Escrow Agent and this Escrow Agreement shall be assigned by the Escrow Agent to such successor Escrow Agent, and thereafter, the resigning Escrow Agent shall be released from any further duties hereunder. The Escrow Agent shall continue to serve until its successor is appointed and has accepted the duties hereunder and has received the transferred Escrow Amount. (f) The Escrow Agent shall not have any right, claim or interest in any portion of the Escrow Amount except for its fees, expenses or costs incurred in its capacity as Escrow Agent hereunder. If any fees, expenses or costs incurred by, or any obligation owed to, the Escrow Agent or its counsel hereunder are not promptly paid when due (and assuming no reasonable dispute has been conveyed in writing to the Escrow Agent by Parent or the Shareholder Representative or both with respect to such fees, expenses, costs or obligations or the amounts thereof), the Escrow Agent may reimburse itself therefor from the Escrow Amount and may sell, convey or otherwise -8- 11 dispose of any Permitted Investment for such purpose; provided, that at least five (5) business days before taking any of the foregoing actions, the Escrow Agent shall provide written notice to Parent and the Shareholder Representative of the Escrow Agent's intention to take any such actions. The Escrow Agent may in its sole discretion withhold from any distribution of the Escrow Amount an amount it believes is reasonably necessary to compensate the Escrow Agent for any unpaid amounts to which the Escrow Agent is entitled hereunder. (g) The duties and responsibilities of the Escrow Agent shall be limited to those expressly set forth herein and no duties, responsibilities or obligations shall be inferred or implied. The Escrow Agent shall not be subject to, nor required to comply with, any other agreement between Parent and the Shareholder Representative or to which Parent or the Shareholder Representative is a party, even though reference thereto may be made herein, or to comply with any direction or instruction (other than those contained herein or delivered in accordance with this Escrow Agreement) from Parent or the Shareholder Representative or any entity acting of such party's behalf. The Escrow Agent shall not be required to expend or risk any of its own funds or otherwise incur any financial or other liability in the performance of any of its duties hereunder. (h) If at any time the Escrow Agent is served with any judicial or administrative order, judgment, decree, writ or other form of judicial or administrative process which in any way affects the Escrow Amount (including but not limited to orders of attachment or garnishment or other forms of levies or injunction or stays relating to the transfer of the Escrow Amount), the Escrow Agent is authorized to comply therewith in any manner it or legal counsel of its own choosing deems reasonably appropriate; and if the Escrow Agent complies with any such judicial or administrative order, judgment, decree, writ or other form of judicial or administrative process, the Escrow Agent shall not be liable to any of the parties hereto or to any other person or entity even though such order, judgment, decree, writ or process may be subsequently modified or vacated or otherwise determined to have been without legal force or effect. (i) As security for the due and punctual performance of any and all of Parent's and the Shareholder Representative's obligations to the Escrow Agent hereunder, now or hereafter arising, Parent and the Shareholder Representative individually and collectively, hereby pledge, assign and grant to the Escrow Agent a continuing security interest in, and a lien on, the Escrow Amount and all Permitted Investments therein. The security interest of the Escrow Agent shall at all times be valid, perfected and enforceable by the Escrow Agent against Parent and the Shareholder Representative and all third parties in accordance with the terms of this Escrow Agreement. (j) The Escrow Agent shall not be responsible in any respect for the form, execution, validity, value or genuineness of documents or securities deposited hereunder or invested herein, or for any description therein, or for the identity, authority or rights of persons executing or delivering or purporting to execute or deliver any such document, security or endorsement. The Escrow Agent shall not be called upon to -9- 12 advise any party as to the wisdom of selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. (k) At any time the Escrow Agent may request an instruction in writing in English from Parent and/or the Shareholder Representative and may, at its option, include in such request the course of action the Escrow Agent proposes to take and the date on which it proposes to act, regarding any matter arising in connection with its duties and obligations hereunder. The Escrow Agent shall not be liable for acting in accordance with such a proposal on or after the date specified therein, provided that the specified date shall be at least three (3) business days after Parent and/or the Shareholder Representative receive the Escrow Agent's request for instruction and its proposed course of action, and provided further that, prior to so acting, the Escrow Agent has not received the written instruction requested. Section 7. SHAREHOLDER REPRESENTATIVE. (a) Pursuant to the Merger Agreement, the Shareholder Representative shall act as the agent of the Shareholders and is entitled to give and receive notices and communications, to authorize delivery by the Escrow Agent to Parent Group Members of specified amounts from the Escrow Amount in satisfaction of claims by Parent Group Members, to object to such deliveries in accordance with the terms of this Escrow Agreement, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the reasonable judgment of the Shareholder Representative for the accomplishment of the foregoing. The Person designated to be Shareholder Representative may be changed in accordance with the provisions set forth in the Merger Agreement. (b) The Shareholder Representative shall not be liable to any holder of Company Common Stock for any act done or omitted under the Merger Agreement or hereunder as Shareholder Representative while acting in good faith and in the exercise of reasonable judgment, and any act done or omitted pursuant to the written advice of counsel shall be conclusive evidence of such good faith. (c) No bond shall be required of the Shareholder Representative and the Shareholder Representative shall receive no compensation for his services hereunder. At least five (5) days prior to the first anniversary of the Effective Date, the Shareholder Representative shall deliver written notice to the Escrow Agent and Parent setting forth the payment amount of the reasonable out-of-pocket expenses incurred by the Shareholder Representative in connection with his duties under the Merger Agreement and hereunder (the "SHAREHOLDER REPRESENTATIVE'S EXPENSES"), which expenses shall be reimbursed from the Escrow Amount upon written instruction of Parent and the Shareholder Representative to the extent that any such Shareholder Representative's Expenses together with any other Acquisition Expenses exceed $200,000. (d) Neither Parent, any Parent Group Member, nor the Escrow Agent shall be responsible or liable for any actions taken, suffered or omitted by the Shareholder -10- 13 Representative in connection with such Shareholder Representative's capacity as such, and each of them may conclusively and fully rely on any action or writing of the Shareholder Representative. (e) A decision, act, consent or instruction of the Shareholder Representative shall constitute a decision of all Shareholders and shall be final, binding and conclusive upon each such Shareholder, and the Escrow Agent and Parent may conclusively and fully rely upon any decision, act, consent or instruction of the Shareholder Representative as being the decision, act, consent or instruction of each and every such Shareholder without any further inquiry or investigation. The Escrow Agent and each Parent Group Member are hereby fully indemnified and relieved from any responsibility or liability to any Person for any actions taken, suffered or omitted by them in accordance with such decision, act, consent or instruction of the Shareholder Representative. Section 8. TAXES. (a) All interest and net gains earned on the Escrow Amount shall be accounted for by the Escrow Agent separately from the Escrow Amount and shall be treated as having been received by Parent and included in its income for tax purposes. The Escrow Agent shall, consistent with such treatment, arrange that for income tax reporting and withholding purposes Parent is named or treated as the payee of such amounts. In this regard, Parent shall provide the Escrow Agent with any certifications or forms required under any applicable tax law. (b) The parties agree that any distribution of the Escrow Amount to a Shareholder shall be treated for tax purposes as a payment pursuant to a contingent debt instrument issued by Parent as part of the Merger Consideration (as defined in the Merger Agreement). The portion of the distribution which the parties shall treat as interest for tax purposes shall be the greater of (i) the amount of the distribution multiplied by a fraction, the numerator of which is the interest (within the meaning of SECTION 5 hereof) on the initial Escrow Amount to the date of the distribution and the denominator of which is the Escrow Amount on such date, or (ii) such larger amount as Parent determines must be reported as interest under section 1274 of the Code (as defined in the Merger Agreement) and the regulations thereunder or other applicable tax law. Section 9. REPRESENTATIONS AND WARRANTIES. (a) Each of Parent and the Company represents and warrants to each of the other parties hereto that it is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of formation; that it has the corporate power and authority to execute and deliver this Escrow Agreement and to perform its obligations hereunder; that the execution, delivery and performance of this Escrow Agreement by it has been duly authorized and approved by all necessary corporate action; that this Escrow Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be -11- 14 limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); and that the execution, delivery and performance of this Escrow Agreement by it will not result in a breach of or loss of rights under or constitute a default under or a violation of any trust (constructive or other), agreement, judgment, decree, order or other instrument to which it is a party or it or its properties or assets may be bound. (b) The Shareholder Representative represents to each of the other parties hereto that he has the power and authority to execute and deliver this Escrow Agreement and to perform his obligations hereunder; that this Escrow Agreement constitutes his legal, valid and binding obligation, enforceable against him in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); and that the execution, delivery and performance of this Escrow Agreement by him will not result in a breach of or loss of rights under or constitute a default under or a violation of any trust (constructive or other), agreement, judgment, decree, order or other instrument to which he is a party or his properties or assets may be bound. Section 10. INDEMNIFICATION PROVISIONS AND PAYMENT OF NET WORTH ADJUSTMENT AMOUNT. (a) INDEMNIFICATION. Each Parent Group Member shall be indemnified, held harmless and reimbursed from the Escrow Amount from and against any and all Loss and Expense incurred by such Parent Group Member in connection with or arising from: (i) any breach by the Company of any of its covenants or its failure to perform any of its obligations in the Merger Agreement; (ii) any breach of any warranty or the inaccuracy of any representation of the Company contained or referred to in the Merger Agreement or any certificate delivered by or on behalf of the Company pursuant hereto; (iii) any breach of any warranty or the inaccuracy of any representation of the Shareholder Representative contained or referred to in this Escrow Agreement or the Merger Agreement or any certificate delivered by the Shareholder Representative pursuant hereto or pursuant to the Merger Agreement; (iv) any breach by the Shareholder Representative of any of its covenants or failure to perform any of its obligations under this Escrow Agreement or the Merger Agreement; (v) any failure by the Company or the Shareholder Representative to obtain, prior to the Closing, any consent set forth in Schedule 5.3 of the Merger Agreement; -12- 15 (vi) the payment by the Company of Acquisition Expenses and Shareholder Representative's Expenses in excess of $200,000; (vii) any payment by the Company in excess of insurance costs resulting from claims disclosed in Schedule 5.21 of the Merger Agreement. (viii) any payments to be made by the Shareholders pursuant to Section 3.2(d) of the Merger Agreement; or (ix) any Losses and Expenses incurred by any Parent Group Member in connection with or arising from the exercise of appraisal rights pursuant to the WBCA by any holders of capital stock of the Company (including, without limitation, all Losses and Expenses associated with any appraisal proceedings and all amounts determined to be payable to any such holders pursuant to Chapter 23B.13 of the WBCA) to the extent that such Losses and Expenses exceed the product of (x) the number of Dissenters' Shares and (y) the Purchase Price divided by the number of shares of Company Common Stock (other than such shares held by Parent) outstanding at the Effective Time; PROVIDED, HOWEVER, that the Escrow Amount shall be used to indemnify and hold harmless hereunder with respect to clauses (ii) and (iii) of this sentence with respect to Losses and Expenses incurred by Parent Group Members (other than any Loss or Expense incurred as a result of inaccuracies of the representations and warranties contained in SECTIONS 5.1 (Organization and Capital Structure), 5.3 (Authority), 5.7 (Taxes), 5.15 (Intellectual Property; Software), 5.16 (Title to Property), 5.21 (Litigation), 5.22 (Environmental Matters) and 5.28 (No Finder) of the Merger Agreement, as to which this proviso shall not apply) unless and until and only to the extent that the aggregate amount of such Losses and Expenses exceeds $500,000. Any payment pursuant to this SECTION 10(a) shall be made in the form of a transfer from the Escrow Amount to the applicable Parent Group Member(s) pursuant to SECTION 3(a). (b) LENGTH OF INDEMNITY. The indemnification provided for in this SECTION 10 shall terminate fifteen (15) months after the Effective Date (and no claims shall be made by any Parent Group Member under this SECTION 10 thereafter), except that such indemnification shall continue as to any Loss or Expense in connection with which a Claim Notice is given in accordance with the requirements of SECTION 3(a)(i) on or prior to the date on which such indemnification obligation would otherwise terminate in accordance with this SECTION 10, as to which the indemnification obligation hereunder shall continue until the liability to be satisfied from the Escrow Amount shall have been determined pursuant to this SECTION 10, and all Parent Group Members shall have been reimbursed out of the Escrow Amount for such Loss or Expense in accordance with the terms hereof. (c) EXCLUSIVE REMEDY. Except for fraud and remedies that cannot be waived as a matter of law and injunctive and provisional relief, the Escrow Amount shall be the sole and exclusive remedy available to Parent Group Members for Losses and Expenses. -13- 16 (d) NET WORTH ADJUSTMENT AMOUNT. Promptly after the final and binding determination of the Purchase Price pursuant to Section 3.2 of the Merger Agreement and upon receipt of notice jointly executed by Parent and the Shareholder Representative, the Escrow Agent shall deliver to Parent the Net Worth Adjustment Amount. Section 11. BENEFIT; SUCCESSOR AND ASSIGNS. This Escrow Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns but shall not be assignable by any party hereto without the written consent of all of the other parties hereto; PROVIDED, HOWEVER, that Parent may assign its rights and delegate its obligations hereunder to any of its Affiliates and that the Escrow Agent may assign its rights hereunder to a successor Escrow Agent appointed hereunder. Except for Parent Group Members and Persons specified in the preceding sentence, this Escrow Agreement is not intended to confer on any person not a party hereto any rights or remedies hereunder. Section 12. TERMINATION. This Escrow Agreement may only be terminated following the delivery of all amounts held in the Escrow Amount and the delivery of notice by the Escrow Agent as contemplated by SECTION 4(c) hereof. Section 13. NOTICES. All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered when delivered personally or four days after being mailed by registered or certified mail, return receipt requested, or one day after being sent by private prepaid overnight courier addressed as follows: IF TO THE ESCROW AGENT: Citibank, N.A. 111 Wall Street 14th Floor, Zone 3 New York, New York 10005 Attention: Citibank Agency & Trust Services IF TO PARENT, THE COMPANY OR ANY OTHER PARENT GROUP MEMBER: Harris Corporation 1025 West NASA Blvd. Melbourne, FL 32919 Attention: Richard Ballantyne -14- 17 WITH A COPY TO: Harris Corporation 330 Twin Dolphin Drive Redwood Shores, CA 94065 Attention: Samuel Wyman AND Sidley & Austin Bank One Plaza 10 South Dearborn Street Chicago, IL 60603 Attention: David J. Zampa IF TO THE SHAREHOLDER REPRESENTATIVE: Thomas T. van Overbeek 10163 Miguelita Road San Jose, CA 95127 WITH COPY TO: Venture Law Group 4750 Carillon Group Kirkland, WA 98033 Attention: Craig E. Sherman or such other address as the Escrow Agent, Parent or the Shareholder Representative, as the case may be, shall designate in writing to the parties hereto. Notwithstanding anything contained in this SECTION 13 to the contrary, the Escrow Agent shall not be deemed to have received any notice unless and until it has actually received such notice. Section 14. GOVERNING LAW. This Escrow Agreement shall be governed by and construed in accordance with the laws of the State of New York other than and without reference to conflict of law rules or principles. Section 15. DISPUTE RESOLUTION. (a) In the event of any controversy, claim or dispute between or among Parent, the Company and the Shareholder Representative arising out of or relating to this Agreement or the Merger Agreement, or any alleged breach thereof, Parent, the Company and the Shareholder Representative shall submit such dispute to non-binding -15- 18 mediation in the City of Seattle, State of Washington for a period of 60 days prior to initiating any legal action in connection therewith, provided that nothing herein shall prevent the party seeking enforcement from seeking temporary or preliminary injunctive relief hereunder from a state or federal court sitting in the City of Seattle, State of Washington (which court shall have exclusive jurisdiction over any such request for relief) to the extent necessary to protect itself from any irreparable harm that it would suffer during the 60-day mediation period. If Parent, the Company and the Shareholder Representative are unable to agree upon a mediator within five (5) business days after receipt of written notice of a claim, either party may apply to the American Arbitration Association for the appointment of a mediator, which appointment shall be final and binding on both parties. The mediation shall be conducted pursuant to the mediation rules of the American Arbitration Association then in effect, unless Parent, the Company and the Shareholder Representative agree to an alternative procedure. Parent, the Company and the Shareholder Representative shall participate in good faith in such mediation, shall bear its own costs of such mediation and shall share the cost of the mediator equally. If any dispute cannot be resolved pursuant to the preceding paragraph within the 60-day mediation period, either Parent or the Shareholder Representative may demand, within 30 days after the end of the 60-day mediation period, that the dispute be submitted to binding arbitration by so notifying such other parties in writing (the "ARBITRATION"). The Arbitration shall be conducted in the City of Seattle, State of Washington, before a single arbitrator. The arbitrator shall be appointed, and the Arbitration shall be conducted, under the rules of the American Arbitration Association in effect at the time of such arbitration, provided that the arbitrator shall have no power to award punitive or exemplary damages to any party to the Arbitration. The arbitrator's decision shall be final, conclusive and binding on the parties to the Arbitration, shall be enforceable in any court of competent jurisdiction, and shall be the exclusive forum for any claims arising out of this Agreement or the subject matter hereof. Section 16. COUNTERPARTS. This Escrow Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 17. HEADINGS. The section headings contained in this Escrow Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Escrow Agreement. Section 18. PARTIAL INVALIDITY. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or -16- 19 unenforceable in any respect, such provision shall be ineffective in the jurisdiction involved to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. Section 19. ENTIRE AGREEMENT; MODIFICATION AND WAIVER. This Escrow Agreement and the Merger Agreement embody the entire agreement and understanding among Parent, the Company and the Shareholder Representative with respect to the subject matter hereof and supersede any and all prior agreements and understandings relating to the subject matter hereof. No amendment, modification or waiver of this Escrow Agreement shall be binding or effective for any purpose unless it is made in a writing signed by the party against whom enforcement of such amendment, modification or waiver is sought. No course of dealing between the parties to this Escrow Agreement shall be deemed to affect or to modify, amend or discharge any provision or term of this Escrow Agreement. No delay by any party to or any beneficiary of this Escrow Agreement in the exercise of any of its rights or remedies shall operate as a waiver thereof, and no single or partial exercise by any party to or any beneficiary of this Escrow Agreement of any such right or remedy shall preclude any other or further exercise thereof. A waiver of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right or remedy on any other occasion. -17- 20 IN WITNESS WHEREOF, the parties hereto have duly executed this Escrow Agreement as of the date first above written. CITIBANK, N.A. By: /s/ Michael L. Stevenson -------------------------------------- Name: Michael L. Stevenson Title: Vice President HARRIS CORPORATION By: /s/ Bryan R. Roub -------------------------------------- Name: Bryan R. Roub Title: Senior Vice President and Chief Financial Officer WAVTRACE, INC. By: /s/ Thomas T. van Overbeek -------------------------------------- Name: Thomas T. van Overbeek Title: President and Chief Executive Officer /s/ Thomas T. van Overbeek ----------------------------------------- THOMAS T. VAN OVERBEEK AS SHAREHOLDER REPRESENTATIVE -18- EX-23.1 4 l83749aex23-1.txt EXHIBIT 23.1 1 Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the: (a) Registration Statement (Form S-8 No. 33-50169) pertaining to the Retirement Plan of Harris Corporation, (b) Registration Statements (Form S-8 No. 33-37969) (Form S-8 No. 33-51171) (Form S-8 No. 333-7985) pertaining to the Stock Incentive Plan of Harris Corporation, (c) Registration Statement (Form S-3 No. 333-03111) pertaining to the issuance of $250,000,000 Debt Securities, and (d) Registration Statement (Form S-3 No. 333-66241) pertaining to the issuance of $500,000,000 Debt Securities, of our report dated July 19, 2000 with respect to the financial statements of Wavetrace, Inc. included in this Current Report (Form 8-K) of Harris Corporation. Filed September 14, 2000. ERNST & YOUNG LLP September 14, 2000 Seattle, Washington EX-99.1 5 l83749aex99-1.txt EXHIBIT 99.1 1 EXHIBIT 99.1 ------------ HARRIS CORPORATION INCREASES STAKE IN BROADBAND WIRELESS ACCESS MARKETS WITH ACQUISITION OF WAVTRACE, INC. BELLEVUE, Washington, August 31, 2000 - Harris Corporation (NYSE: HRS), today announced that it has completed the previously announced purchase of Wavtrace, Inc., a privately held, Bellevue, Washington-based pioneer and leading developer of broadband wireless access systems. Harris officials noted in ceremonies at the Bellevue facilities that the acquisition significantly elevates its participation in fast-growing markets for infrastructure systems that provide high-speed wireless access to the Internet and other data, voice, and video services. "We intend to become the leading supplier of microwave products and services for network solutions worldwide," said Phillip W. Farmer, chairman and CEO of Harris. "The acquisition of Wavtrace provides us with leading technology for BWA (broadband wireless access) point-to-multipoint (PMP) products, and positions Harris to be the leader in BWA products and solutions. Wavtrace's high-frequency products are an excellent complement to our current low-frequency PMP product line and our industry-leading point-to-point microwave radio systems. We have the broadest, most robust product offering in the industry and the capability to provide our customers with complete, one-stop shopping as they build and expand their wireless communications networks." Wavtrace is developing a broadband PMP system for millimeter wave transmissions based on TDD (time division duplexing) technology, which is ideal for transporting high-speed bursts of data traffic, such as that found on the Internet, in a spectrum-efficient manner. "TDD has gained recognition in the industry as the most appropriate technology for LMDS (local multipoint distribution system) broadband wireless access," Farmer said. Wavtrace is successfully testing its product in Europe and the U.S. and is expected to release 2 a production product next spring that will incorporate adaptive TDD capabilities. The product is expected to have the fastest burst modem in the industry, enabling the delivery of multimedia services at speeds up to 180 Mbps per user, four times as fast as competing systems. Harris purchased approximately a 20 percent interest in Wavtrace in June 1999 and has been working with the company to develop point-to-multipoint BWA systems. Pursuant to the transaction which was closed today, Harris purchased the remainder of Wavtrace for approximately $134 million. Wavtrace employs approximately 110 people, including 80 engineers, at its Bellevue facilities. Wavtrace will become part of Harris' Microwave Communications Division, headquartered in Redwood Shores, California, and the Wavtrace product will become part of Harris' ClearBurst(TM) BWA product line. Harris Corporation (NYSE: HRS) is an international communications equipment company providing product, system, and service solutions for wireless, broadcast, network support, and government markets. The Microwave Communications Division, one of five divisions within Harris Corporation, is the largest supplier of microwave and broadband wireless access systems in North America. The division delivers wireless solutions to telecom service providers of all types, and its product line -- the broadest in the industry -- covers frequency bands up to 42 GHz. Harris has sales and service facilities in nearly 90 countries. FORWARD LOOKING STATEMENTS This press release contains forward-looking statements that reflect management's current expectations, assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Harris cautions investors that any forward-looking statements are subject to risks and uncertainties that may cause actual results and future trends to differ materially from those matters expressed in or implied by such forward-looking statements. Statements about the expected date of product releases, and the impact of the transaction on Harris' business and its microwave business are forward-looking and involve risks and uncertainties. Other factors that may impact the company's results and forward-looking statements may be disclosed in the company's filings with the SEC. Harris 3 disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. ### 8-K 6 l83749ae8-k_pdf.pdf COURTESY COPY OF HARRIS CORPORATION 8-K begin 666 DOC.PDF M)5!$1BTQ+C(-"B7BX\_3#0HR(#`@;V)J#0H\/`T*+TQE;F=T:"`R.#,Y#0H^ M/@T*&%C="!N86UE(&]F(')E9VES=')A;G0@87,@&5C M=71I=F4@;V9F:6-E2E4:@T*+T8S(#$@5&8-"C,N.#(@,"!41`T**%PR,C1<*2P@86-Q M=6ER960@*51J#0HM,S@N.#@@+3$N,30@5$0-"BA7879T7-T96US(&9O2!T=V5N='D@<&5R8V5N="!<*#(P)5PI(&]F M(%=A=G1R86-E+B!0=7)S=6%N="!T;R!T:&4@=&5R;7,@;V8@*51J#0HM,2XU M,#`Q("TQ+C$T(%1$#0I;*$UE2`D,3,T*2TR-3`H;6EL;&EO;B!E>&-L=61I;F<@8V%S:"`I M751*#0I4*@T**&%C<75I&EM871E;'D@,C$V+#`P,"!(87)R:7,@2!A;F0@17-C2!A;F0@:&]L9"!(87)R M:7,@:&%R;6QE2!S=69F97(@87,@82!R97-U;'0@;V8@ M86YY(&)R96%C:"!O9B!R97!R97-E;G1A=&EO;B!O2!M861E M(&)Y(%=A=G1R86-E(&EN('1H92`I5&H-"E0J#0HH365R9V5R($%G&AI8FET*2TR M-3`H,BXR+B!4:&4@<')EF5D M('1H92!R97!U2!I;B!T:&4@;W!E;BUM87)K970L(&EN(&YE9V]T:6%T960@ 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EX-2.1

   1
                                                                     Exhibit 2.1





                               AGREEMENT OF MERGER

                            DATED AS OF JULY 28, 2000

                                      AMONG

                               HARRIS CORPORATION,

                              WT ACQUISITION CORP.

                                 WAVTRACE, INC.

                                       AND

                             THOMAS T. VAN OVERBEEK




   2
                                TABLE OF CONTENTS

                                                                          PAGE


ARTICLE I  DEFINITIONS.......................................................2
     1.1.  Definitions.......................................................2

ARTICLE II  THE MERGER.......................................................8
     2.1.  Surviving Corporation.............................................8
     2.2.  Effects of the Merger.............................................8
     2.3.  Articles of Incorporation, Bylaws, Directors and Officers.........9

ARTICLE III  CONVERSION OF SHARES; DETERMINATION OF PURCHASE PRICE...........9
     3.1.  Conversion Terms..................................................9
     3.2.  Determination of Purchase Price...................................9
     3.3.  Exchange Procedures..............................................12

ARTICLE IV  CLOSING.........................................................14
     4.1.  Closing Date.....................................................14
     4.2.  Filing Articles of Merger and Effectiveness......................14
     4.3.  Parent's Deliveries..............................................15
     4.4.  Mergerco's Deliveries............................................15
     4.5.  The Company's Deliveries.........................................16

ARTICLE V  REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDER
           REPRESENTATIVE...................................................16
     5.1.  Organization and Capital Structure...............................17
     5.2.  Subsidiaries and Investments.....................................18
     5.3.  Authority........................................................18
     5.4.  Financial Statements.............................................19
     5.5.  Operations Since Balance Sheet Date..............................19
     5.6.  No Undisclosed Liabilities.......................................22
     5.7.  Taxes............................................................22
     5.8.  Availability of Assets and Legality of Use.......................23
     5.9.  Governmental Permits.............................................23
     5.10.  Real Property...................................................24
     5.11.  Real Property Leases............................................24
     5.12.  Condemnation....................................................24
     5.13.  Personal Property...............................................25
     5.14.  Personal Property Leases........................................25
     5.15.  Intellectual Property; Software.................................25
     5.16.  Title to Property...............................................28
     5.17.  Employee Benefit Plans..........................................28
     5.18.  Employee Relations..............................................32
     5.19.  Contracts; Product Warranties...................................32

   3

     5.20.  Status of Contracts.............................................33
     5.21.  No Violation, Litigation or Regulatory Action...................34
     5.22.  Environmental Matters...........................................34
     5.23.  Insurance.......................................................36
     5.24.  Customers and Suppliers.........................................37
     5.25.  Budgets.........................................................37
     5.26.  Consent Materials...............................................37
     5.27.  Required Vote of Shareholders...................................38
     5.28.  No Finder.......................................................38
     5.29.  Ultimate Parent Entity..........................................38
     5.30.  Disclosure......................................................38

ARTICLE VI  REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO...........38
     6.1.  Organization and Capital Structure...............................38
     6.2.  Authority........................................................39
     6.3.  Information Supplied by Parent for Consent Materials.............40
     6.4.  No Finder........................................................40

ARTICLE VII  ACTION PRIOR TO THE EFFECTIVE TIME.............................40
     7.1.  Action by the Company; Shareholder Meeting and Preparation of
           the Consent Materials............................................40
     7.2.  Action by Parent.................................................41
     7.3.  Investigation of the Company by Parent...........................41
     7.4.  Preserve Accuracy of Representations and Warranties..............42
     7.5.  Consents of Third Parties; Governmental Approvals................42
     7.6.  Conduct of Business Prior to the Effective Time..................42
     7.7.  Notification by the Company of Certain Matters...................45
     7.8.  Mutual Cooperation; Reasonable Best Efforts......................46
     7.9.  Company Stock Options............................................46
     7.10.  State Takeover Laws.............................................48
     7.11.  Termination of Company 401(k) Plan..............................48

ARTICLE VIII  ADDITIONAL AGREEMENTS.........................................48
     8.1.  Employee Benefits................................................48

ARTICLE IX  CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO......48
     9.1.  No Misrepresentation or Breach of Covenants and Warranties.......48
     9.2.  No Changes or Destruction of Property............................49
     9.3.  No Restraint or Injunction.......................................49
     9.4.  Necessary Governmental Approvals.................................49
     9.5.  Necessary Consents...............................................49
     9.6.  Shareholder Approval and Conversion of Preferred Stock...........50
     9.7.  Dissenters' Rights...............................................50
     9.8.  Effective Agreements.............................................50
     9.9.  Other Convertible Securities.....................................50

                                       ii
   4

     9.10.  Agreement with Wideband.........................................50
     9.11.  Opinion of Intellectual Property Counsel........................50

ARTICLE X  CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY...............51
     10.1.  No Misrepresentation or Breach of Covenants and Warranties......51
     10.2.  No Restraint or Injunction......................................51
     10.3.  Necessary Governmental Approvals................................51
     10.4.  Shareholder Approval............................................51
     10.5.  Effective Agreements. The Escrow Agreement shall be in full
            force and effect................................................51

ARTICLE XI  TERMINATION.....................................................51
     11.1.  Termination Rights..............................................51
     11.2.  Notice of Termination...........................................52
     11.3.  Effect of Termination...........................................52

ARTICLE XII  GENERAL PROVISIONS.............................................52
     12.1.  Survival of Obligations.........................................52
     12.2.  Confidential Nature of Information..............................52
     12.3.  No Public Announcement..........................................53
     12.4.  Notices.........................................................53
     12.5.  Successors and Assigns; Shareholder Representative..............54
     12.6.  Entire Agreement; Amendments....................................56
     12.7.  Interpretation..................................................56
     12.8.  Waivers.........................................................56
     12.9.  Fees and Expenses...............................................56
     12.10.  Partial Invalidity.............................................57
     12.11.  Execution in Counterparts......................................57
     12.12.  Further Assurances.............................................57
     12.13.  Governing Law..................................................57







EXHIBITS
A        Foster Employment Agreement
B        Escrow Agreement
C        Non-Competition Agreement
D        Opinion of Company Counsel
E        Release
F        Foster Non-Competition Agreement

                                     iii
   5



SCHEDULES

A        Significant Shareholders
B        Employee to Execute Employment Agreement
C        Persons to Execute Non-Competition Agreements
D        Shareholders to Execute Releases
1.1      Exceptions to Agreed Accounting Principles
5.1      Organization and Capital Structure
5.3      Noncontravention
5.4      Financial Statements
5.5(A)   Operations Since Balance Sheet Date
5.5(B)   Conduct of Business Since Balance Sheet Date
5.7      Taxes
5.9      Governmental Permits
5.10     Owned Real Property
5.11     Leased Real Property
5.13     Owned Personal Property
5.14     Leased Personal Property
5.15     Intellectual Property; Software
5.16     Title to Property
5.17(A)  ERISA Benefit Plans
5.17(B)  Non-ERISA Commitments
5.17(C)  Multiemployer Plans
5.17(E)  Plan Administration
5.17(F)  Liability Under Plans
5.17(I)  List of Employees
5.17(K)  Conflicts of Interest
5.18     Employee Relations
5.19     Contracts; Product Warranties
5.21     Violations, Litigation and Regulatory Actions
5.22     Environmental Matters
5.23     Insurance
5.24     Customers and Suppliers
5.25     Budgets
7.9      Company Options
9.5      Necessary Consents

                                       iv
   6


                               AGREEMENT OF MERGER

     AGREEMENT OF MERGER, dated as of July 28, 2000, among Harris Corporation, a
Delaware corporation ("PARENT"), WT Acquisition Corp., a Washington corporation
("MERGERCO"), Wavtrace, Inc., a Washington corporation (the "COMPANY"), and
Thomas T. van Overbeek, a natural person (the "SHAREHOLDER REPRESENTATIVE")
(Mergerco and the Company being hereinafter sometimes referred to as the
"CONSTITUENT CORPORATIONS").

                              W I T N E S S E T H:

     WHEREAS, Mergerco is a Washington corporation having an authorized capital
of 1,000 shares of common stock, par value $ .01 per share, all of which are
issued and outstanding and owned of record and beneficially by Parent; and

     WHEREAS, the Company is a Washington corporation having an authorized
capital of (i) 60,000,000 shares of common stock, par value $.001 per share (the
"COMPANY COMMON STOCK"), of which, as of the date hereof, 4,295,769 shares are
issued and outstanding, and (ii) 41,000,000 shares of preferred stock, par value
$.001 per share (the "PREFERRED STOCK"), of which (A) 4,986,142 shares have been
designated Series A Preferred Stock (of which, as of the date hereof, 4,686,666
shares are issued and outstanding and are convertible into 5,957,627 shares of
Company Common Stock), (B) 4,044,668 shares have been designated Series B
Preferred Stock (of which, as of the date hereof, 4,014,668 shares are issued
and outstanding), and are convertible into 8,961,313 shares of Company Common
Stock), and (C) 31,969,190 shares have been designated Series C Preferred Stock
(of which, as of the date hereof, 26,916,467 shares are issued and outstanding);
and are convertible into 26,916,467 shares of Company Common Stock); and

     WHEREAS, the Company is engaged in the business of the design and
manufacturing of telecommunications equipment; and

     WHEREAS, the respective Boards of Directors of the Constituent Corporations
and of Parent have adopted the merger (the "MERGER") of Mergerco into the
Company pursuant to the terms and conditions of this Agreement, and the Board
of Directors of the Company has directed that this Agreement be submitted to
the Company's shareholders for approval; and

     WHEREAS, Parent and each of the individuals and entities identified on
SCHEDULE A (the "SIGNIFICANT SHAREHOLDERS") have entered into Voting Agreements
(the "VOTING AGREEMENTS") dated as of the date hereof; and

                                      -1-
   7

     WHEREAS, Parent, Mergerco, the Company and the Shareholder Representative
desire to make certain representations, warranties and agreements in connection
with the Merger and also to prescribe various conditions to the Merger;

     NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, it is hereby agreed among the parties as follows:


                                   ARTICLE I

                                   DEFINITIONS

     1.1. DEFINITIONS. In this Agreement, the following terms have the meanings
specified or referred to in this SECTION 1.1 and shall be equally applicable to
both the singular and plural forms. Any agreement referred to below shall mean
such agreement as amended, supplemented and modified from time to time to the
extent permitted by the applicable provisions thereof and by this Agreement.


     "AFFILIATE" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by or is under common control
with such Person.


     "AGREED ACCOUNTING PRINCIPLES" means generally accepted accounting
principles consistently applied, PROVIDED that, with respect to any matter as to
which there is more than one generally accepted accounting principle, Agreed
Accounting Principles means the generally accepted accounting principles applied
in the preparation of the Audited Financial Statements included in SCHEDULE 5.4;
and, PROVIDED, FURTHER, that, notwithstanding the foregoing, Agreed Accounting
Principles shall include the accounting policies and be subject to the
exceptions described in SCHEDULE 1.1.


     "BALANCE SHEET" means the audited balance sheet of the Company as of
December 31, 1999 included in SCHEDULE 5.4.


     "BALANCE SHEET DATE" means December 31, 1999.


     "BEST KNOWLEDGE" or "KNOWLEDGE" or any similar reference or derivation
thereof, means with reference to a party hereto the current conscious awareness
of any of the directors and officers of any such party, including any knowledge
or awareness of facts or circumstances that any such party should have
discovered after due inquiry.


     "CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C.ss. 9601 ET SEQ., any amendments thereto, any
successor statutes, and any regulations promulgated thereunder.


     "CLOSING" means the closing of the Merger of Mergerco with and into the
Company in accordance with ARTICLE IV.


     "CLOSING CONSIDERATION" means a dollar amount equal to the Purchase Price
LESS the Escrow Amount.


                                      -2-
   8

     "CODE" means the Internal Revenue Code of 1986, as amended from time to
time.


     "COMPANY ANCILLARY AGREEMENTS" means all agreements, instruments and
documents being or to be executed and delivered by the Company under this
Agreement or in connection herewith.


     "COMPANY GROUP" means any "affiliated group" (as defined in SECTION
1504(a) of the Code without regard to the limitations contained in SECTION
1504(b) of the Code) that, at any time on or before the Effective Time,
includes or has included the Company or any predecessor of or successor to the
Company (or another such predecessor or successor), or any other group of
corporations which, at any time on or before the Effective Date, files or has
filed Tax Returns on a combined, consolidated or unitary basis with the
Company or any predecessor of or successor to the Company (or another such
predecessor or successor).


     "COMPANY PROPERTY" means any real or personal property, plant, building,
facility, structure, underground storage tank, equipment or unit, or other asset
owned, leased or operated by the Company (including any surface water thereon or
adjacent thereto and any soil or ground water thereunder), whether currently or
at any previous time.

     "CONTAMINANT" means any waste, pollutant, hazardous or toxic substance or
waste, petroleum, petroleum-based substance or waste, special waste, or any
constituent of any such substance or waste.

     "COURT ORDER" means any judgment, order, award or decree of any foreign,
federal, state, local or other court or tribunal and any award in any
arbitration proceeding.


     "DISSENTERS' SHARES" means shares of Company Common Stock with respect to
which appraisal rights shall have been properly perfected in accordance with the
WBCA.


     "EMPLOYMENT AGREEMENTS" means the Employment Agreements between the Company
and the individuals identified on SCHEDULE B, in a form mutually agreed to by
the parties thereto.


     "ENCUMBRANCE" means any lien, claim, charge, security interest, mortgage,
pledge, easement, conditional sale or other title retention agreement, defect in
title, covenant or other restriction of any kind.


     "ENVIRONMENTAL ENCUMBRANCE" means an Encumbrance in favor of any
Governmental Body for (i) any liability under any Environmental Law, or (ii)
damages arising from, or costs incurred by such Governmental Body in response
to, a Release or threatened Release of a Contaminant into the environment.


                                      -3-
   9

     "ENVIRONMENTAL LAW" means all Requirements of Laws derived from or relating
to all federal, state and local laws or regulations relating to or addressing
the environment, health or safety, including but not limited to CERCLA, OSHA and
RCRA and any state equivalent thereof.


     "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including any regulations promulgated thereunder.


     "ESCROW AGENT" means that Person who shall be mutually selected by Parent
and the Shareholder Representative to act as escrow agent pursuant to the Escrow
Agreement.


     "ESCROW AGREEMENT" means the Indemnification and Escrow Agreement in the
form of EXHIBIT B, subject to any reasonable revisions requested by the Escrow
Agent and agreed to by Parent and the Shareholder Representative.


     "ESCROW AMOUNT" means a dollar amount equal to the sum of 10% of the
Purchase Price.


     "ESCROW PAYMENT" means any amount payable to the former shareholders of the
Company pursuant to the Escrow Agreement.


     "FOSTER EMPLOYMENT AGREEMENT" means the Employment Agreement, in the form
of EXHIBIT A, between the Company and Robert Foster.


     "FOSTER NON-COMPETITION AGREEMENT" means the Non-Competition Agreement, in
the form of EXHIBIT F, between the Company and Robert Foster.


     "FULLY DILUTED PER SHARE PRICE" means $175 million divided by the number of
fully diluted shares of Company Common Stock assuming the cash conversion or
exercise of all outstanding convertible securities, warrants and options for
Company capital stock.


     "GOVERNMENTAL BODY" means any foreign, federal, state, local or other
governmental authority or regulatory body.


     "IRS" means the Internal Revenue Service.


     "LETTER AGREEMENT" means the Letter Agreement dated July 7, 2000 among
Parent, the Company and the shareholders of the Company that executed such
agreement.


     "MATERIAL ADVERSE EFFECT" means any change or effect (or any development
that, insofar as can be reasonably foreseen, would result in any change or
effect) that is materially adverse to the assets, business, financial condition,
results of operations or prospects of the applicable person or persons.


     "MERGER" has the meaning in the fourth recital of this Agreement.


                                      -4-
   10

     "MERGERCO" has the meaning specified in the first paragraph of this
Agreement.


     "NON-COMPETITION AGREEMENTS" means the Non-Competition Agreements, in the
form of EXHIBIT C, to be dated the Effective Date among the Company, Parent and
each of the Persons identified on SCHEDULE C.


     "OSHA" means the Occupational Safety and Health Act, 29 U.S.C.ss. 651 ET
SEQ., any amendment thereto, any successor statute, and any regulations
promulgated thereunder.


     "PARENT ANCILLARY AGREEMENTS" means all agreements, instruments and
documents being or to be executed and delivered by Parent under this Agreement
or in connection herewith.

     "PARENT GROUP MEMBER" means Parent and its Affiliates and their respective
successors and assigns, including, after the Effective Time, the Surviving
Corporation.

     "PER SHARE CLOSING PAYMENT" means the Closing Consideration DIVIDED BY the
number of shares of Company Common Stock (other than such shares held by Parent)
outstanding at the Effective Time.

     "PER SHARE ESCROW PAYMENT" means, in respect of any Escrow Payment, the
amount of such payment DIVIDED BY the number of shares of Company Common Stock
(other than such shares held by Parent) outstanding at the Effective Time.

     "PERMITTED ENCUMBRANCES" means (a) liens for taxes and other governmental
charges and assessments which are not yet due and payable, (b) liens of
landlords and liens of carriers, warehousemen, mechanics and materialmen and
other like liens arising in the ordinary course of business for sums not yet due
and payable and (c) other liens or imperfections on property which are not
material in amount, do not interfere with, and are not violated by the
consummation of the transactions contemplated by, this Agreement and do not
materially detract from the value or marketability of, or materially impair the
existing use of, the property affected by such lien or imperfection.


     "PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
Governmental Body.

     "PREFERRED STOCK HOLDERS" means the holders of shares of Preferred Stock of
the Company.


     "PURCHASE PRICE" means $ 175 million LESS (i) (x) the Fully Diluted Per
Share Price less the weighted average of the exercise prices of the unvested
options to acquire Company Common Stock multiplied by (y) the number of unvested
options to acquire Company Common Stock; (ii) the Fully Diluted Per Share Price
multiplied by 14,464,573 (the number of fully diluted shares of Company Common
Stock held by Parent); (iii) the aggregate dollar amount that shall be paid to
the holders of vested

                                      -5-
   11

Company Stock Options that have not been exercised prior to the Effective Time
pursuant to SECTION 7.9(b); and (iv) 2.1 million in respect of the dollar amount
that the Company shall owe to Hambrecht & Quist LLC ("H & Q") upon consummation
of the Merger pursuant to the letter agreement between the Company and H & Q
dated January 24, 2000 PLUS the amount of cash, if any, received by the Company
upon exercise of any of the warrants held by parties other than Parent.


     "RCRA" means the Resource Conservation and Recovery Act, 42
U.S.C.ss. 6901 ET SEQ., and any successor statute, and any regulations
promulgated thereunder.


     "RELEASE" means any release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migration of a Contaminant
into the indoor or outdoor environment or into or out of any Company Property,
including the movement of Contaminants through or in the air, soil, surface
water, groundwater or any Company Property.


     "REMEDIAL ACTION" means actions required to (i) clean up, remove, treat or
in any other way address Contaminants in the indoor or outdoor environment; (ii)
prevent the Release or threatened Release or minimize the further Release of
Contaminants or (iii) investigate and determine if a remedial response is needed
and to design such a response and post-remedial investigation, monitoring,
operation and maintenance and care.


     "REQUIREMENTS OF LAWS" means any foreign, federal, state and local laws,
statutes, regulations, rules, codes or ordinances enacted, adopted, issued or
promulgated by any Governmental Body (including, without limitation, those
pertaining to electrical, building, zoning, environmental and occupational
safety and health requirements) or common law.


     "SHAREHOLDERS" mean the holders of shares of capital stock of the Company.


     "SHAREHOLDER REPRESENTATIVE ANCILLARY AGREEMENTS" means all agreements,
instruments and documents being or to be executed and delivered by the
Shareholder Representative under this Agreement or in connection herewith.


     "TARGET NET WORTH" means negative $9.3 million excluding (i) the amount
that the Company shall owe to Hambrecht & Quist LLC ("H & Q") upon consummation
of the Merger pursuant to the letter agreement between the Company and H & Q
dated January 24, 2000 and (ii) up to $200,000 of Acquisition Expenses of the
Shareholder Representative and the Company relating to the transactions
contemplated by this Agreement.


     "TAX" (and with correlative meaning "Taxes" and "Taxable") means:


          (i) any federal, state, local or foreign net income, alternative or
     add-on minimum, gross income, gross receipts, property, ad valorem, sales,
     use, transfer, gains, license, franchise, severance, excise, employment,
     payroll, environmental, windfall profit, withholding, alternative or add on
     minimum tax,

                                      -6-
   12

     stamp or any other tax, custom, duty, governmental fee or other like
     assessment or charge of any kind whatsoever, together with any interest or
     any penalty, addition to tax or additional amount imposed by any
     Governmental Body; and


          (ii) any liability of the Company or any subsidiary for the payment of
     amounts with respect to payments of a type described in clause (i) of this
     definition as a result of being a member of an affiliated, consolidated,
     combined or unitary group, or as a result of any obligation of the Company
     or any subsidiary under any tax sharing arrangement or Tax indemnity
     arrangement.


     "TAX RETURN" means any return, report or similar statement required to be
filed with respect to any Taxes (including any attached schedules), including,
without limitation, any information return, claim for refund, amended return or
declaration of estimated Tax.


     "VALUATION DATE" means the close of business on the last business day prior
to the Effective Date.


     "VALUATION DATE NET WORTH" means the excess of the total assets over the
total liabilities reflected in the Valuation Date Balance Sheet.


     "WBCA" means the Washington Business Corporation Act, as amended.


     Each of the following terms is defined on the page of this Agreement set
forth opposite such term:


ACCOUNTING FIRM.........................................................15
COMPANY COMMON STOCK.....................................................6
ACQUISITION EXPENSES....................................................61
ADDITIONAL ACCOUNTING REPORT............................................16
AGREED ADJUSTMENTS......................................................15
ASSOCIATE...............................................................36
AUDITED FINANCIAL STATEMENTS............................................24
CLOSING DATE............................................................19
COMPANY..................................................................6
COMPANY AGREEMENTS......................................................38
COMPANY CERTIFICATES....................................................16
CONSENT MATERIALS.......................................................42
CONSTITUENT CORPORATIONS.................................................6
COPYRIGHTS..............................................................30
EFFECTIVE DATE..........................................................19
EFFECTIVE TIME..........................................................19
ERISA AFFILIATE.........................................................36
EXCHANGE AGENT..........................................................16
EXCHANGE FUND...........................................................16
GOVERNMENTAL PERMITS....................................................28
INTELLECTUAL PROPERTY...................................................30
LEASED REAL PROPERTY....................................................29

                                      -7-
   13

MERGER...................................................................6
MERGER CONSIDERATION....................................................14
MERGERCO.................................................................6
MULTIEMPLOYER PLANS.....................................................34
NET WORTH ADJUSTMENT AMOUNT.............................................16
NON-ERISA COMMITMENTS...................................................33
OWNED REAL PROPERTY.....................................................29
OWNED SOFTWARE..........................................................32
PARENT...................................................................6
PATENT RIGHTS...........................................................30
PENSION PLANS...........................................................33
PREFERRED STOCK..........................................................6
PRELIMINARY ACCOUNTING REPORT...........................................14
PRELIMINARY PURCHASE PRICE..............................................14
PRELIMINARY VALUATION DATE BALANCE SHEET................................14
PRIOR PENSION PLANS.....................................................33
SHAREHOLDER MEETING.....................................................42
SHAREHOLDER REPRESENTATIVE...............................................6
SIGNIFICANT SHAREHOLDERS.................................................6
SOFTWARE................................................................30
STATEMENTS OF OPERATIONS................................................24
SURVIVING CORPORATION...................................................13
TRADE SECRETS...........................................................30
TRADEMARKS..............................................................30
UNAUDITED FINANCIAL STATEMENTS..........................................24
VALUATION DATE BALANCE SHEET............................................15
VOTING AGREEMENTS........................................................6
WARN....................................................................35
WELFARE PLANS...........................................................33

                                   ARTICLE II

                                   THE MERGER

     2.1. SURVIVING CORPORATION. Subject to the conditions contained herein and
in accordance with the provisions of this Agreement and the WBCA at the
Effective Time Mergerco shall be merged with and into the Company, which, as the
corporation surviving in the Merger (the "SURVIVING CORPORATION"), shall
continue unaffected and unimpaired by the Merger to exist under and be governed
by the laws of the State of Washington. Upon the effectiveness of the Merger,
the separate existence of Mergerco shall cease except to the extent provided by
law in the case of a corporation after its merger into another corporation.

     2.2. EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
Section 23B.11.060 of the WBCA.

                                      -8-
   14

     2.3. ARTICLES OF INCORPORATION, BYLAWS, DIRECTORS AND OFFICERS. The
Articles of Incorporation and Bylaws of Mergerco, as in effect immediately prior
to the Effective Time, shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation. The directors and officers of the Mergerco immediately
prior to the Effective Time shall be the initial directors and officers of the
Surviving Corporation until their respective successors are duly elected and
qualified.

                                  ARTICLE III

              CONVERSION OF SHARES; DETERMINATION OF PURCHASE PRICE

     3.1. CONVERSION TERMS. As of the Effective Time, by virtue of the Merger
and without any action on the part of any shareholder of the Company or
Mergerco:

     (a) Each share of common stock of Mergerco issued and outstanding
immediately prior to the Effective Time shall be converted into and become one
fully paid and nonassessable share of common stock, par value $.001 per share,
of the Surviving Corporation.

     (b) All shares of Company Common Stock that immediately prior to the
Effective Time are held by Parent shall be cancelled and revert to the status of
authorized but unissued shares and no capital stock of the Surviving
Corporation, cash or other consideration shall be paid or delivered in exchange
therefor.

     (c) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (after taking into account the cancellation of
shares of Company Common Stock pursuant to this SECTION 3.1 and other than
Dissenters' Shares) shall be converted into and become the right to receive the
following (the "MERGER CONSIDERATION"):

          (i) the Per Share Closing Payment; PLUS

          (ii) the Per Share Escrow Payments, if any.


     All such shares of Company Common Stock, when so converted, shall no longer
be outstanding and shall automatically be cancelled and retired.


     (d) All unvested Company Stock Options outstanding immediately subsequent
to the Effective Time shall become options to purchase common stock of Parent
pursuant to SECTION 7.9.

3.2.     DETERMINATION OF PURCHASE PRICE.

     (a) As promptly as practicable following the Effective Date (but not later
than 60 days after the Effective Date), Parent shall cause the Company to:

                                      -9-
   15

          (i) prepare, in accordance with the Agreed Accounting Principles, a
     balance sheet of the Company as of the Valuation Date (the "PRELIMINARY
     VALUATION DATE BALANCE SHEET"),

          (ii) determine the Purchase Price in accordance with the provisions of
     this Agreement (such Purchase Price as determined by the Company being
     called the "PRELIMINARY PURCHASE PRICE") and

          (iii) deliver to the Shareholder Representative the Preliminary
     Valuation Date Balance Sheet and a certificate setting forth the
     Preliminary Purchase Price (the "PRELIMINARY ACCOUNTING REPORT").

     (b) Promptly following receipt of the Preliminary Accounting Report, the
Shareholder Representative shall review the same and, within 30 days after the
date of such receipt, may deliver to Parent a certificate signed by it setting
forth its objections to the Preliminary Valuation Date Balance Sheet and the
Preliminary Purchase Price as set forth in the Preliminary Accounting Report,
together with a summary of the reasons therefor and calculations which, in its
view, are necessary to eliminate such objections. In the event the Shareholder
Representative does not so object within such 30-day period, the Preliminary
Valuation Date Balance Sheet and the Preliminary Purchase Price set forth in the
Preliminary Accounting Report shall be final and binding as the "VALUATION DATE
BALANCE SHEET" and the "PURCHASE PRICE," respectively, for purposes of this
Agreement, but shall not limit the representations, warranties, covenants and
agreements of the parties set forth elsewhere in this Agreement.

     (c) In the event the Shareholder Representative so objects within such
30-day period, Parent and the Shareholder Representative shall use their
reasonable best efforts to resolve by written agreement (the "AGREED
ADJUSTMENTS") any differences as to the Preliminary Valuation Date Balance Sheet
and the Preliminary Purchase Price and, in the event Parent and the Shareholder
Representative so resolve any such differences, the Preliminary Valuation Date
Balance Sheet and the Preliminary Purchase Price set forth in the Preliminary
Accounting Report as adjusted by the Agreed Adjustments shall be final and
binding as the "VALUATION DATE BALANCE SHEET" and the "PURCHASE PRICE,"
respectively, for purposes of this Agreement, but shall not limit the
representations, warranties, covenants and agreements of the parties set forth
elsewhere in this Agreement. In the event any objections raised by the
Shareholder Representative are not resolved by Agreed Adjustments within the
30-day period next following such 30-day period, then Parent and the Shareholder
Representative shall jointly select a national accounting firm acceptable to
both Parent and the Shareholder Representative (or if they cannot agree on such
selection, a national accounting firm will be selected by lot after eliminating
the independent public accountants for Parent and the Company) and the firm so
selected (the "ACCOUNTING FIRM") shall be directed by Parent and the Shareholder
Representative to conduct a special audit of the Preliminary Valuation Date
Balance Sheet and the Preliminary Purchase Price as promptly as reasonably
practicable and, upon completion of such audit, to deliver written notice to
each of Parent and the Shareholder Representative setting forth:


                                      -10-
   16

          (i) a summary of all adjustments (including all adjustments for
     immaterial misstatements which became known to the Accounting Firm during
     the course of such audit) to the Preliminary Valuation Date Balance Sheet
     and the Preliminary Purchase Price necessary to permit the Accounting Firm
     to deliver the hereinafter described audit report; and

          (ii) an audit report stating (without qualification) that in its
     opinion (x) the Preliminary Valuation Date Balance Sheet (after giving
     effect to such adjustments) as audited by such firm has been prepared in
     accordance with the Agreed Accounting Principles, (y) the Preliminary
     Purchase Price (after giving effect to such adjustments) has been
     determined in accordance with the provisions of this Agreement, and (z) all
     adjustments (which became known to the Accounting Firm during the course of
     the above-described audit) for items or matters, regardless of the amount
     thereof, were taken into account in the adjustments referred to in clause
     (i) (such written notice and related summary and certificate being herein
     called the "ADDITIONAL ACCOUNTING REPORT").


The Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price,
as so determined but after giving effect to the adjustments set forth in the
Additional Accounting Report shall be final and binding as the "VALUATION DATE
BALANCE SHEET" and the "PURCHASE PRICE," respectively, for purposes of this
Agreement, but shall not limit the representations, warranties, covenants and
agreements of the parties set forth elsewhere in this Agreement.

     (d) The parties hereto shall make available to Parent, the Shareholder
Representative and, if applicable, the Accounting Firm, such books, records and
other information (including work papers) as they may reasonably request to
audit or review the Preliminary Accounting Report hereunder. One half of the
fees and expenses of the Accounting Firm related to any special audit of the
Preliminary Valuation Date Balance Sheet and the Preliminary Purchase Price
hereunder shall be paid by the former shareholders of the Company (in the form
of a payment pursuant to the Escrow Agreement) and the other half shall be paid
by Parent. In connection with any such special audit or determination or review
of the Preliminary Valuation Date Balance Sheet or the Preliminary Purchase
Price hereunder, Parent, the Shareholder Representative and, if applicable, the
Accounting Firm shall exchange work papers and other information related to such
audit or the determination of the Valuation Date Balance Sheet and the Closing
Consideration hereunder with a view towards resolving any potential differences
with respect thereto.

(e) Promptly after the determination of the Purchase Price pursuant to this
SECTION 3.2 that is final and binding, Parent shall be entitled to receive a
payment, pursuant to the terms and subject to the conditions of the Escrow
Agreement, in an amount, if any, by which the Target Net Worth exceeds the
Valuation Date Net Worth (the "NET WORTH ADJUSTMENT AMOUNT").

                                      -11-
   17

3.3.     EXCHANGE PROCEDURES.

     (a) EXCHANGE AGENT. On the Closing Date, Parent shall deposit with an
exchange to be determined by Parent prior to the Closing (the "EXCHANGE AGENT"),
for the benefit of the holders of shares of Company Common Stock, for exchange
in accordance with this ARTICLE III, through the Exchange Agent, cash equal to
the Closing Consideration (such cash, together with any earnings with respect
thereto, and such certificates being hereinafter referred to as the "EXCHANGE
FUND").

     (b) EXCHANGE PROCEDURES.

          (i) Prior to the Effective Date, the counsel to the Company or the
     Exchange Agent shall mail to each holder of record of a certificate or
     certificates that immediately prior to the Effective Time represented
     outstanding shares of Company Common Stock that were converted into the
     right to receive the Merger Consideration (the "COMPANY CERTIFICATES")
     pursuant to SECTION 3.1, (i) a letter of transmittal (which shall specify
     that delivery shall be effected, and risk of loss and title to the Company
     Certificates shall pass, only upon delivery of the Company Certificates to
     the Exchange Agent and shall be in such form and have such other provisions
     as Parent and the Company may reasonably specify) and (ii) instructions for
     use in effecting the surrender of the Company Certificates in exchange for
     the Per Share Closing Payment for each share of Company Common Stock
     represented by such Company Certificates.

          (ii) Upon surrender of a Company Certificate for cancellation to the
     Exchange Agent, together with such letter of transmittal, duly executed,
     and such other documents as may reasonably be required by the Exchange
     Agent, the holder of such Company Certificate shall be entitled to receive,
     in exchange for each share of Company Common Stock represented thereby, the
     Per Share Closing Payment, and the Company Certificate so surrendered shall
     forthwith be canceled. In the event of a transfer of ownership of Company
     Common Stock that is not registered in the transfer records of the Company,
     payment may be made to a Person other than the Person in whose name the
     Company Certificate so surrendered is registered, if such Company
     Certificate shall be properly endorsed or otherwise be in proper form for
     transfer and the Person requesting such payment shall pay any transfer or
     other taxes required by reason of such payment to a Person other than the
     registered holder of such Company Certificate or establish to the
     satisfaction of Parent that such tax has been paid or is not applicable.
     Subject to the applicable provisions of the WBCA, until surrendered as
     contemplated by this SECTION 3.3, each Company Certificate shall be deemed
     at any time after the Effective Time to represent only the right to receive
     upon such surrender the Per Share Closing Payment for each share of Company
     Common Stock represented by such Company Certificate as contemplated by
     this SECTION 3.3. No interest shall be paid or accrue on

                                      -12-
   18

     any cash payable, whether in respect of the Per Share Closing Payments,
     dividends or otherwise, upon surrender of any Company Certificate.

     (c) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. The Merger
Consideration paid in accordance with the terms of this ARTICLE III upon
conversion of any shares of Company Common Stock shall be deemed to have been
paid in full satisfaction of all rights pertaining to such shares of Company
Common Stock, subject, however, to the Surviving Corporation's obligations to
pay or provide for the rights of dissenters. If, after the Effective Time, any
certificates formerly representing shares of Company Common Stock are presented
to the Surviving Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this ARTICLE III.

     (d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund that
remains undistributed to the holders of Company Common Stock for twelve months
after the Closing Date shall be delivered to the Surviving Corporation, upon
demand, and any holder of Company Common Stock who has not theretofore complied
with this ARTICLE III shall thereafter look only to the Surviving Corporation
for payment of its claim for Merger Consideration.

     (e) NO LIABILITY. None of Parent, the Surviving Corporation or the Exchange
Agent shall be liable to any Person in respect of any cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Company Certificate has not been
surrendered prior to five years after the Effective Time (or immediately prior
to such earlier date on which the Per Share Closing Payments payable in respect
of such Company Certificate would otherwise escheat to or become the property of
any Governmental Body), any such shares, cash dividends or distribution in
respect of such Company Certificate shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation, free and clear of all
claims or interest of any Person previously entitled thereto.

     (f) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by the Surviving Corporation, on a
daily basis. Any interest and other income resulting from such investments shall
be paid to the Surviving Corporation.

     (g) WITHHOLDING RIGHTS. The Surviving Corporation shall be entitled to
deduct and withhold from the consideration otherwise payable to any holder of
Company Common Stock pursuant to this Agreement such amounts as may be required
to be deducted and withheld with respect to the making of such payment under the
Code, or under any provision of state, local or foreign tax law. The Surviving
Corporation will pay such withheld amounts to the appropriate taxing authority.

     (h) CERTAIN ADJUSTMENTS. If after the date hereof and on or prior to the
Closing Date, the outstanding shares of Company Common Stock shall be changed
into a different number of shares by reason of any reclassification,
recapitalization, split-up,

                                      -13-
   19

combination or exchange of shares, or any dividend payable in stock or other
securities is declared thereon with a record date within such period, or any
similar event shall occur, the Per Share Closing Payment will be adjusted
accordingly to provide to the holders of Company Common Stock the same economic
effect as contemplated by this Agreement prior to such reclassification,
recapitalization, split-up, combination, exchange or dividend or similar event.
This provision is not intended to affect the need for either party to obtain the
other party's consent to take such an action under any other provision of this
Agreement.

     (i) DISSENTER'S RIGHTS. Notwithstanding any provision of this Agreement to
the contrary, any Dissenters' Shares shall not be converted into or represent a
right to receive any of the Merger Consideration, but the holder shall only be
entitled to such rights as are granted by the WBCA. If a holder of shares of
Company Common Stock who demands appraisal of such shares under the WBCA shall
effectively withdraw or otherwise lose (through failure to perfect or otherwise)
the right to appraisal, then, as of the Effective Time or the occurrence of such
event, whichever last occurs, each such share of Company Common Stock shall be
converted into and represent only the right to receive the Per Share Closing
Payment, without interest, upon the surrender of the certificate or certificates
representing such share of Company Common Stock and the Per Share Escrow Payment
pursuant to the Escrow Agreement. The Company shall give Parent prompt notice of
any written demands for appraisal of any shares of Company Common Stock,
attempted withdrawals of such demands, and any other instruments served pursuant
to the WBCA received by the Company relating to shareholders' rights of
appraisal. The Company shall not, except with the prior written consent of
Parent, voluntarily make any payment with respect to any demands for appraisals
of capital stock of the Company, offer to settle any demands or approve any
withdrawal of any such demands.

                                   ARTICLE IV

                                     CLOSING

     4.1. CLOSING DATE. The Closing of the Merger shall take place at 10:00
A.M., local time, on the fifth business day following the day on which the last
of the conditions set forth in ARTICLES IX and X shall have been fulfilled or
waived (if permissible) or at such other time and place as Parent and the
Company shall agree at the offices of Venture Law Group, 4750 Carillon Point,
Kirkland, WA 98033. The date on which the Closing is actually held is
hereinafter sometimes referred to as the "CLOSING DATE."

     4.2. FILING ARTICLES OF MERGER AND EFFECTIVENESS. Subject to the
fulfillment or waiver of the conditions to the respective obligations of each of
the parties set forth in ARTICLE IX or ARTICLE X, as the case may be, at the
Closing the parties shall cause the Merger to be consummated by filing a
Articles of Merger (which shall be in form and substance reasonably satisfactory
to the parties hereto), executed and acknowledged in accordance with the laws of
the State of Washington, in the office of the Secretary of State of the State of
Washington. The Merger shall become effective upon such filing

                                      -14-
   20

as provided by the WBCA. The date and time on such date of effectiveness of the
Merger are herein called, respectively, the "EFFECTIVE DATE" and the "EFFECTIVE
TIME."

     4.3. PARENT'S DELIVERIES. Subject to fulfillment or waiver of the
conditions set forth in ARTICLE IX, at the Effective Time Parent shall deliver
to the Shareholder Representative all of the following:

     (a) a copy of the Certificate of Incorporation of Parent, certified as of a
recent date by the Secretary of State of the State of Delaware;

     (b) a certificate of good standing of Parent, issued as of a recent date by
the Secretary of State of the State of Delaware;

     (c) a certificate of the Secretary or an Assistant Secretary of Parent,
dated the Effective Date, in form and substance reasonably satisfactory to the
Shareholder Representative, as to (i) no amendments to the Certificate of
Incorporation of Parent since a specified date; (ii) the Bylaws of Parent; and
(iii) the incumbency and signatures of the officers of Parent executing this
Agreement and any Parent Ancillary Agreement; and

     (d) the certificate contemplated by SECTION 10.1, duly executed by the
President or any Vice President of Parent.

     4.4. MERGERCO'S DELIVERIES. Subject to fulfillment or waiver of the
conditions set forth in ARTICLE IX, at the Effective Time Mergerco shall deliver
to the Shareholder Representative all of the following:

     (a) a copy of the Articles of Incorporation of Mergerco certified as of a
recent date by the Secretary of State of the State of Washington;

     (b) a certificate of existence/due authorization of Mergerco, issued as of
a recent date by the Secretary of State of the State of Washington;

     (c) a certificate of the Secretary or an Assistant Secretary of Mergerco,
dated the Effective Date, in form and substance reasonably satisfactory to the
Shareholder Representative, as to (i) no amendments to the Articles of
Incorporation of Mergerco since a specified date; (ii) the Bylaws of Mergerco;
(iii) the resolutions of the Board of Directors of Mergerco authorizing the
execution and performance of this Agreement and the transactions contemplated
herein and the written consent of Parent approving this Agreement in accordance
with Section 23B.11.030 of the WBCA; and (iv) the incumbency and signatures of
the officers of Mergerco executing this Agreement; and

     (d) the certificate contemplated by SECTION 10.1, duly executed by the
President or any Vice President of Mergerco.

                                      -15-
   21

     4.5. THE COMPANY'S DELIVERIES. Subject to fulfillment or waiver of the
conditions set forth in ARTICLE X, at the Effective Time the Company shall
deliver to Parent all of the following:

     (a) a copy of the Articles of Incorporation of the Company, certified as of
a recent date by the Secretary of State of the State of Washington;

     (b) a certificate of existence/due authorization of the Company, issued as
of a recent date by the Secretary of State of the State of Washington;

     (c) a certificate of the Secretary or an Assistant Secretary of the
Company, dated the Effective Date, in form and substance reasonably satisfactory
to Parent, as to (i) no amendments to the Articles of Incorporation of the
Company since a specified date; (ii) the Bylaws of the Company; (iii) the
resolutions of the Board of Directors of the Company authorizing the execution
and performance of this Agreement and the transactions contemplated herein and
of the Shareholders and the Preferred Stock Holders approving this Agreement in
accordance with the Articles of Incorporation and the Bylaws of the Company and
Section 23B.11.030 of the WBCA; (iv) the actions taken by the Preferred Stock
Holders necessary in order to effect the automatic conversion of all of the
shares of Preferred Stock into shares of Company Common Stock; and (v) the
incumbency and signatures of the officers of the Company executing this
Agreement and any Seller Ancillary Agreement;

     (d) an opinion of Venture Law Group, a Professional Corporation, counsel to
the Company, dated the Effective Date and in form and substance reasonably
satisfactory to Parent, substantially in the form contained in EXHIBIT D;

     (e) all consents, waivers or approvals obtained by the Company with respect
to the consummation of the transactions contemplated by this Agreement;

     (f) resignations of each of the directors and each of the officers of the
Company, effective as of the Effective Time;

     (g) the certificates contemplated by SECTIONS 9.1 and 9.2, duly executed by
the President or any Vice President of the Company; and

     (h) releases executed by those Shareholders set forth on SCHEDULE D,
substantially in the form contained in EXHIBIT E.

                                   ARTICLE V

  REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDER REPRESENTATIVE


         As an inducement to Parent and Mergerco to enter into this Agreement
and to consummate the transactions contemplated hereby, the Shareholder
Representative represents and warrants to Parent and Mergerco and agrees as to
those representations and warranties made by the Shareholder Representative in
SECTION 5.3,

                                      -16-
   22

and the Company represents and warrants to Parent and Mergerco and agrees as
follows:

     5.1. ORGANIZATION AND CAPITAL STRUCTURE. The Company is a corporation duly
organized, and validly existing under the laws of the State of Washington. The
Company is duly qualified to transact business as a foreign corporation and is
in good standing in each of the jurisdictions listed in SCHEDULE 5.1, which are
the only jurisdictions in which the ownership or leasing of the its assets or
the conduct of its business requires such qualification, except where the
failure to be so qualified would not individually or in the aggregate have a
Material Adverse Effect on the Company, and no other jurisdiction has demanded,
requested or otherwise indicated that the Company is required so to qualify. The
Company has full power and authority to own or lease and to operate and use its
assets and to carry on its business as now conducted or proposed to be
conducted. True and complete copies of the Articles of Incorporation and all
amendments thereto and of the Bylaws, as amended, of the Company have been
delivered to Parent.


     The authorized capital of the Company consists of (1) 60,000,000 shares of
common stock, $.001 par value per share, of which 4,295,769 have been issued and
are outstanding, none are held as treasury shares and, except as set forth in
SCHEDULE 5.1, none is reserved for any purpose, (2) 4,986,142 shares of Series A
Preferred Stock, $.001 par value share, of which 4,686,666 shares have been
issued and are outstanding, and are convertible into 5,957,627 shares of Common
Stock, (3) 4,044,668 shares of Series B Preferred Stock, $.001 par value per
share, of which 4,014,668 shares have been issued and are outstanding, and are
convertible into 8,961,313 shares of Common Stock, and (4) 31,969,190 shares of
Series C Preferred Stock, $.001 par value per share, of which 26,916,467 shares
have been issued and are outstanding and are convertible into 26,916,467 shares
of Common Stock. Except warrants to purchase an aggregate of (1) 112,632 shares
of Common Stock, (2) 299,476 shares of Series A Preferred Stock (convertible
into 380,691 shares of Common Stock), (3) 30,000 shares of Series B Preferred
Stock (convertible into 66,964 shares of Common Stock) and (4) 4,422,587 shares
of Series C Preferred Stock (convertible into 4,422,587 shares of Common Stock)
and 10,680,026 options granted and outstanding under the Company's 1995 and 1999
Stock Option Plans, there are no agreements, arrangements, options, warrants,
calls, rights or commitments of any character relating to the issuance, sale,
purchase or redemption of any shares of capital stock or other equity interest
of the Company, whether on conversion of other securities or otherwise. None of
the issued and outstanding shares of the Company's capital stock has been issued
in violation of, or is subject to, any preemptive or subscription rights. Except
as set forth in this Agreement and in SCHEDULE 5.1, the Company is not a party
to, or otherwise have any knowledge of the current existence of, any shareholder
agreement, voting trust agreement or any other similar contract, agreement,
arrangement, commitment, plan or understanding restricting or otherwise relating
to the voting, dividend, ownership or transfer rights of any shares of capital
stock of the Company. All of the outstanding shares of capital stock of the
Company are validly issued, fully paid and nonassessable and owned of record and
beneficially by the Shareholder Representative, free from all Encumbrances.

                                      -17-
   23

     5.2. SUBSIDIARIES AND INVESTMENTS. The Company does not, directly or
indirectly, (i) own, of record or beneficially, any outstanding voting
securities or other equity interests in any corporation, partnership, joint
venture or other entity or (ii) control any corporation, partnership, joint
venture or other entity. The Company has never, directly or indirectly, (i)
owned, of record or beneficially, any outstanding voting securities or other
equity interests in any corporation, partnership, joint venture or other entity
or (ii) controlled any corporation, partnership, joint venture or other entity.

     5.3. AUTHORITY. The Company has full power and authority to execute,
deliver and perform this Agreement and all of the Company Ancillary Agreements.
The execution, delivery and performance of this Agreement and the Company
Ancillary Agreements by the Company have been duly authorized, approved and
adopted by the Company's board of directors and, except for the approval of this
Agreement by the Shareholders in accordance with SECTION 7.1 and the filing
contemplated by SECTION 4.2, no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is the legal, valid and binding obligation of the
Company enforceable in accordance with its terms, and each of the Company
Ancillary Agreements has been duly authorized by the Company and upon execution
and delivery by the Company will be a legal, valid and binding obligation of the
Company enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by the
effect of general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).


     The Shareholder Representative has full power and authority to execute,
deliver and perform this Agreement and all of the Shareholder Representative
Ancillary Agreements. This Agreement has been duly executed and delivered by the
Shareholder Representative and is the legal, valid and binding obligation of the
Shareholder Representative enforceable in accordance with its terms, and each of
the Shareholder Representative Ancillary Agreements, upon execution and delivery
by the Shareholder Representative, will be a legal, valid and binding obligation
of the Shareholder Representative enforceable in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by the effect of general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law).


     Except as set forth in SCHEDULE 5.3, neither the execution and delivery of
this Agreement, any of the Company Ancillary Agreements or any of the
Shareholder Representative Ancillary Agreements or the consummation of any of
the transactions contemplated hereby or thereby nor compliance with or
fulfillment of the terms, conditions and provisions hereof or thereof will:

          (i) conflict with, result in a breach of the terms, conditions or
     provisions of, or constitute a default, an event of default or an event

                                      -18-
   24

     creating rights of acceleration, termination or cancellation or a loss of
     rights under, or result in the creation or imposition of any Encumbrance
     upon, any of the Company's assets, under (1) the Articles of Incorporation
     or Bylaws of the Company, (2) any Company Agreement, (3) any other material
     note, instrument, agreement, mortgage, lease, license, franchise, permit or
     other authorization, right, restriction or obligation to which either the
     Company or the Shareholder Representative is a party or any of their
     respective assets or business is subject or by which either the Company or
     the Shareholder Representative is bound, (4) any Court Order to which
     either the Company or the Shareholder Representative is a party or any of
     their respective assets or business is subject or by which either the
     Company or the Shareholder Representative is bound, or (5) any Requirements
     of Laws affecting either the Company or the Shareholder Representative or
     their respective assets or business; or

          (ii) require the approval, consent, authorization or act of, or the
     making by either the Company or the Shareholder Representative of any
     declaration, filing or registration with, any Person, except as provided in
     SECTION 4.2.

     5.4. FINANCIAL STATEMENTS. SCHEDULE 5.4 contains (i) the audited balance
sheets of the Company as of December 31, 1999 and 1998 and the related
statements of operations (the "STATEMENTS OF OPERATIONS"), shareholders' equity
(deficit) and cash flows for each of the years then ended, together with the
appropriate notes to such financial statements, accompanied by the report
thereon of Ernst & Young, independent public accountants (the "AUDITED FINANCIAL
STATEMENTS"), and (ii) the unaudited balance sheet of the Company as of June 30,
2000 and the related unaudited statements of operations, shareholders' equity
(deficit) and cash flows operations for the six months then ended (the
"UNAUDITED FINANCIAL STATEMENTS"). Except as disclosed in the notes thereto, the
Audited Financial Statements and the Unaudited Financial Statements have been
prepared in conformity with generally accepted accounting principles
consistently applied and fairly present in all material respects the financial
position of the Company at the dates of such balance sheets and the results of
its operations and cash flows for the respective periods indicated, except that
the Unaudited Financial Statements are subject to normal year-end audit
adjustments. None of the financial statements referred to in this SECTION 5.4
contains any material items of special or nonrecurring income except as
expressly specified therein. Except as set forth on SCHEDULE 5.4 or in the
Unaudited Financial Statements, the Unaudited Financial Statements include all
adjustments, which consist only of normal recurring accruals, necessary for such
fair presentation, other than normal year-end audit adjustments. All costs and
expenses incurred in generating the revenues reflected in the Audited Financial
Statements during the respective periods covered thereby that are required by
generally accepted accounting principles to be reflected in the Audited
Statements of Income are so reflected.

     5.5. OPERATIONS SINCE BALANCE SHEET DATE. (a) Except as set forth in
SCHEDULE 5.5(A), since the Balance Sheet Date, there has been:

                                      -19-
   25

          (i) no material adverse change in the assets, business, financial
     condition, results of operations or prospects of the Company, and no fact
     or condition exists or is contemplated or threatened which might reasonably
     be expected to cause such a change in the future; and

          (ii) no damage, destruction, loss or claim, whether or not covered by
     insurance, or condemnation or other taking adversely affecting in any
     material respect any of the Company's assets or its business.

     (b) Except as set forth in SCHEDULE 5.5(B), since the Balance Sheet Date,
the Company has conducted its business only in the ordinary course and in
conformity with past practice. Without limiting the generality of the foregoing,
since the Balance Sheet Date, except as set forth in such Schedule, the Company
has not:

          (i) issued, delivered or agreed (conditionally or unconditionally) to
     issue or deliver, or granted any option, warrant or other right to
     purchase, any of its capital stock or other equity interest or any security
     convertible into its capital stock or other equity interest;

          (ii) issued, delivered or agreed (conditionally or unconditionally) to
     issue or deliver any of its bonds, notes or other debt securities, or
     borrowed or agreed to borrow any funds, other than in the ordinary course
     of business consistent with past practice;

          (iii) paid any obligation or liability (absolute or contingent) other
     than current liabilities reflected on the Balance Sheet and current
     liabilities incurred since the Balance Sheet Date in the ordinary course of
     business consistent with past practice;

          (iv) declared or made, or agreed to declare or make, any payment of
     dividends or distributions to its Shareholders or purchased or redeemed, or
     agreed to purchase or redeem, any of its capital stock or other equity
     interest, except in each case as provided herein;

          (v) except in the ordinary course of business consistent with past
     practice, made or permitted any material amendment or termination of any
     Company Agreement;

          (vi) except as set forth in the budgets included in Schedule 5.25,
     undertaken or committed to undertake capital expenditures exceeding $50,000
     for any single project or related series of projects;

          (vii) made charitable donations in excess of $1,000 in the aggregate;

          (viii) sold, leased (as lessor), transferred or otherwise disposed of,
     or mortgaged or pledged, or imposed or suffered to be imposed any
     Encumbrance on, any of the assets reflected on the Balance Sheet or any

                                      -20-
   26

     assets acquired by the Company after the Balance Sheet Date, except for
     inventory and minor amounts of personal property sold or otherwise disposed
     of for fair value in the ordinary course of its business consistent with
     past practice and except for Permitted Encumbrances;

          (ix) cancelled any debts owed to or claims held by the Company
     (including the settlement of any claims or litigation) other than in the
     ordinary course of its business consistent with past practice;

          (x) created, incurred or assumed, or agreed to create, incur or
     assume, any indebtedness for borrowed money or entered into, as lessee, any
     capitalized lease obligations (as defined in Statement of Financial
     Accounting Standards No. 13);

          (xi) accelerated or delayed collection of notes or accounts receivable
     in advance of or beyond their regular due dates or the dates when the same
     would have been collected in the ordinary course of its business consistent
     with past practice;

          (xii) delayed or accelerated payment of any account payable or other
     liability beyond or in advance of its due date or the date when such
     liability would have been paid in the ordinary course of its business
     consistent with past practice;

          (xiii) entered into or become committed to enter into any other
     material transaction except in the ordinary course of business;

          (xiv) allowed the levels of raw materials, supplies, work-in-process
     or other materials included in the inventory of the Company to vary in any
     material respect from the levels customarily maintained in its business;

          (xv) instituted any increase in any compensation payable to any
     employee of the Company or in any profit-sharing, bonus, incentive,
     deferred compensation, insurance, pension, retirement, medical, hospital,
     disability, welfare or other benefits made available to employees of the
     Company;

          (xvi) prepared or filed any Tax Return inconsistent with past practice
     or, on any such Tax Return, taken any position, made any election, or
     adopted any method that is inconsistent with positions taken, elections
     made or methods used in preparing or filing similar Tax Returns in prior
     periods (including, without limitation, positions, elections or methods
     which would have the effect of deferring income to periods after the
     Closing Date or accelerating deductions to periods prior to the Closing
     Date);

                                      -21-
   27

          (xvii) made any change in the accounting principles and practices used
     by the Company from those applied in the preparation of the Balance Sheet
     and the related statements of income, the shareholders' equity and cash
     flow for the twelve months ended on the Balance Sheet Date; or

          (xviii) entered into or become committed to enter into any other
     material transactions except in the ordinary course of business consistent
     with past practice.

     5.6. NO UNDISCLOSED LIABILITIES. The Company is not subject to any material
liability (including, without limitation, unasserted claims, whether known or
unknown), whether absolute, contingent, accrued or otherwise, which is not shown
or which is in excess of amounts shown or reserved for in the Balance Sheet,
other than liabilities of the same nature as those set forth in the Balance
Sheet and the notes thereto and reasonably incurred in the ordinary course of
its business consistent with past practice after the Balance Sheet Date.

     5.7. TAXES. (a) Except as set forth on SCHEDULE 5.7, (i) the Company has
filed all Tax Returns required to be filed; (ii) all such Tax Returns are
complete and accurate in all material respects and disclose all Taxes required
to be paid by the Company for the periods covered thereby and all Taxes shown to
be due on such Tax Returns have been timely paid; (iii) the Company is not
currently the beneficiary of any extension of time within which to file any Tax
Return; (iv) all Taxes (whether or not shown on any Tax Return) owed by the
Company have been timely paid; (v) the Company has not waived or been requested
to waive any statute of limitations in respect of Taxes which waiver is
currently in effect; (vi) the Tax Returns referred to in clause (i), to the
extent related to income Taxes, have been examined by the appropriate taxing
authority or the period for assessment of the Taxes in respect of which such Tax
Returns were required to be filed has expired; (vii) there is no action, suit,
investigation, audit, claim or assessment pending or proposed or threatened with
respect to Taxes of the Company and, to the best knowledge of the Company, no
basis exists therefor; (viii) all deficiencies asserted or assessments made as a
result of any examination of the Tax Returns referred to in clause (i) have been
paid in full, except to the extent that a reserve for such Taxes has been
reflected on the Unaudited Financial Statements; (ix) all Tax sharing
arrangements and Tax indemnity arrangements relating to the Company (other than
this Agreement) will terminate prior to the Closing Date and the Company will
not have any liability thereunder on or after the Closing Date; (x) there are no
liens for Taxes upon the assets of the Company, except liens relating to current
Taxes not yet due; (xi) all Taxes which the Company is required by law to
withhold or to collect for payment have been duly withheld and collected, and
have been paid or accrued, reserved against and entered on the books of the
Company; (xii) the Company has not been a member of any Company Group and the
Company has not had any direct or indirect ownership in any corporation,
partnership, joint venture or other entity; (xiii) the Company qualified as, and
properly elected to be, at all times from the date of its incorporation through
November 18, 1996, an "S corporation" for purposes of Subchapter S of the Code,
and during such period also qualified for, and where necessary elected to have
applicable,

                                      -22-
   28

similar tax treatment with respect to all relevant states which, for income or
franchise Tax purposes, allow a corporation to be treated as an "S corporation"
or similar entity; and (xiv) from the date of its incorporation through November
18, 1996, no entity level Tax was imposed on the Company, including any Tax
under section 1374 of the Code;

     (b) The Company is not, nor has it ever been, a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, and
neither Mergerco nor Parent is required to withhold tax from the Purchase Price
by reason of Section 1445 of the Code.


     (c) No payment or other benefit, and no acceleration of the vesting of any
options, payments or other benefits, will be, as a direct or indirect result of
the transactions contemplated by this Agreement, an "excess parachute payment"
to a "disqualified individual" as those terms are defined in SECTION 280G of the
Code and the Treasury Regulations thereunder, except in the case of payments,
benefits or acceleration with respect to which shareholder approval meeting the
requirements of Section 280G(b)(5) of the Code is obtained.


     (d) Following the Closing Date, the Company will not have any liability for
Taxes for any taxable year or period that ends on or before the Closing Date or,
with respect to any taxable year that begins before and ends after the Closing
Date, for the portion of such year that ends on and includes the Closing Date,
except to the extent reflected on the Valuation Date Balance Sheet.

     5.8. AVAILABILITY OF ASSETS AND LEGALITY OF USE. The assets owned or leased
by the Company constitute all the assets used in its business (including, but
not limited to, all books, records, computers and computer programs and data
processing systems) and are in good condition (subject to normal wear and tear
and immaterial impairments of value and damage) and serviceable condition and
are generally suitable for the uses for which intended. SCHEDULE 5.8 also sets
forth a description of all material services provided by any Affiliate of the
Company to the Company utilizing either (i) assets not owned by the Company as
of the Effective Time or (ii) employees not listed in SCHEDULE 5.18(G) pursuant
to clause (i) of SECTION 5.18(g), and the manner in which the costs of providing
such services have been charged to the Company.

     5.9. GOVERNMENTAL PERMITS. The Company owns, holds or possesses all
licenses, franchises, permits, privileges, immunities, approvals and other
authorizations from Governmental Bodies which are necessary to entitle it to own
or lease, operate and use its assets and to carry on and conduct its business
substantially as currently conducted (herein collectively called "GOVERNMENTAL
PERMITS"). SCHEDULE 5.9 sets forth a list and brief description of each
Governmental Permit, except for such incidental licenses, permits and other
authorizations which would be readily obtainable by any qualified applicant
without undue burden in the event of any lapse, termination, cancellation or
forfeiture thereof. Complete and correct copies of all of the Governmental
Permits have heretofore been delivered to Parent.


                                      -23-
   29

         Except as set forth in SCHEDULE 5.9, (i) the Company has fulfilled and
performed its obligations under each of the Governmental Permits, and no event
has occurred or condition or state of facts exists which constitutes or, after
notice or lapse of time or both, would constitute a breach or default under any
such Governmental Permit or which permits or, after notice or lapse of time or
both, would permit revocation or termination of any such Governmental Permit, or
which might adversely affect in any material respect the rights of the Company
under any such Governmental Permit; (ii) no notice of cancellation, of default
or of any material dispute concerning any Governmental Permit, or of any event,
condition or state of facts described in the preceding clause, has been received
by, or is known to, the Company; and (iii) each of the Governmental Permits is
valid, subsisting and in full force and effect and will continue in full force
and effect after the Effective Date of the Merger, in each case without (x) the
occurrence of any breach, default or forfeiture of rights thereunder, or (y) the
consent, approval, or act of, or the making of any filing with, any Governmental
Body.

     5.10. REAL PROPERTY. SCHEDULE 5.10 contains a brief description of each
parcel of real property owned by the Company (the "OWNED REAL PROPERTY")
(showing the record title holder, legal description, permanent index number,
location, improvements, the uses being made thereof and any indebtedness secured
by a mortgage or other Encumbrance thereon) and of each option held by the
Company to acquire any real property. Complete and correct copies of any
instruments evidencing Encumbrances, commitments for the issuance of title
insurance, title opinions, surveys and appraisals in the possession of the
Company or any policies of title insurance currently in force and in the
possession of the Company with respect to each such parcel have heretofore been
delivered to Parent.

     5.11. REAL PROPERTY LEASES. SCHEDULE 5.11 sets forth a list of each lease
or similar agreement under which (i) the Company is lessee of, or holds or
operates, any real property owned by any third Person (the "LEASED REAL
PROPERTY") or (ii) the Company is lessor of any of the Owned Real Property.
Except as set forth in such Schedule, the Company has the right to quiet
enjoyment of all the real property described in such Schedule of which it is the
Lessee for the full term of each such lease or similar agreement (and any
related renewal option) relating thereto, and the leasehold or other interest of
the Company in such real property is not subject or subordinate to any
Encumbrance except for Permitted Encumbrances. Complete and correct copies of
any instruments evidencing Encumbrances, commitments for the issuance of title
insurance, title opinions, surveys and appraisals in the possession of the
Company or any policies of title insurance currently in force and in the
possession of the Company with respect to each such parcel of leased property
have heretofore been delivered to Parent.

     5.12. CONDEMNATION. Neither the whole nor any part of the Owned Real
Property or any real property leased, used or occupied by the Company is subject
to any pending suit for condemnation or other taking by any public authority or
other Person, and, to the best knowledge of the Company, no such condemnation or
other taking is threatened or contemplated.

                                      -24-
   30

     5.13. PERSONAL PROPERTY. SCHEDULE 5.13 contains a detailed list of all
machinery, equipment, vehicles, furniture and other personal property owned by
the Company having an original cost of $1,000 or more.

     5.14. PERSONAL PROPERTY LEASES. SCHEDULE 5.14 contains a brief description
of each lease or other agreement or right, whether written or oral (including in
each case the annual rental, the expiration date thereof and a brief description
of the property covered), under which the Company is lessee of, or holds or
operates, any machinery, equipment, vehicle or other tangible personal property
owned by a third Person, except for any such lease, agreement or right that is
terminable by the Company without penalty or payment on notice of 30 days or
less, or which involves the payment by the Company of rentals of less than
$1,000 per year.

     5.15. INTELLECTUAL PROPERTY; SOFTWARE. (a) SCHEDULE 5.15 contains a list
and description (showing in each case any product, device, process, service,
business or publication covered thereby, the registered or other owner,
expiration date and number, if any) of all intellectual property owned by,
licensed to, or used by the Company in the conduct of the Company's business
("INTELLECTUAL PROPERTY"). The Intellectual Property includes:

          (i) all United States and foreign patents, patent applications,
     continuations, continuations-in-part, divisions, reissues, patent
     disclosures, inventions (whether or not patentable) or improvements thereto
     ("PATENT RIGHTS");

          (ii) all United States, state and foreign trademarks, service marks,
     logos, trade dress and trade names (including all assumed or fictitious
     names under which the Company is conducting its business or has within the
     previous five years conducted its business), whether registered or
     unregistered, and pending applications to register the foregoing
     ("TRADEMARKS");

          (iii) all United States and foreign copyrights, whether registered or
     unregistered and pending applications to register the same ("COPYRIGHTS");
     and

          (iv) all confidential ideas, trade secrets, know-how, concepts,
     methods, processes, formulae, reports, data, customer lists, mailing lists,
     business plans, or other proprietary information ("TRADE SECRETS").

     (b) SCHEDULE 5.15 contains a list and description (showing in each case any
owner, licensor or licensee) of all computer software programs and software
systems owned by, licensed to, or used by the Company in the conduct of the
Company's business, including, without limitation, all databases, compilations,
tool sets, compilers, higher level or proprietary languages, related
documentation and materials, whether in source code, object code or human
readable form ("SOFTWARE"); PROVIDED, HOWEVER, that SCHEDULE 5.15 may omit
Software licensed to Licensee that is available in consumer

                                      -25-
   31

retail stores and subject to license agreements that become effective when the
purchaser breaks the Software package.

     (c) SCHEDULE 5.15 contains a list and description of all agreements,
commitments, contracts, understandings, licenses, sublicenses, assignments and
indemnities which relate or pertain to any Intellectual Property or Software
identified in SECTIONS 5.15(a) and 5.15(b) above or to disclosure or use of
ideas or information of the Company or third Persons to which the Company is a
party, showing in each case the parties thereto and the material terms thereof.

     (d) Except as disclosed on SCHEDULE 5.15, the Company either: (i) owns the
entire right, title and interest in and to the Intellectual Property and
Software, free and clear of any Encumbrance; or (ii) has the perpetual,
royalty-free right to use the same.

     (e) Except as disclosed on SCHEDULE 5.15, the Company is not in breach of
any material provision of any material agreement, commitment, contract,
understanding, license, sublicense, assignment or indemnity which relates to any
of the Intellectual Property or Software, and the Company has not taken any
action which would impair or otherwise adversely effect its rights in any of the
Intellectual Property or Software. The Company has all right, power and
authority with respect to the Intellectual Property, Software and materials
identified in SECTION 5.15(c), to execute and deliver this Agreement and the
Company Ancillary Agreements, to consummate the transactions contemplated hereby
and thereby and to comply with or fulfill the terms, conditions or provisions
hereof or thereof. The transactions contemplated by this Agreement and the
Company Ancillary Agreements shall have no adverse effect on the validity and
enforceability of any of the Intellectual Property, Software or materials
identified in SECTION 5.15(c), and the Company's right, title and interest
thereto immediately after the Effective Time shall be identical to that of the
Company immediately prior to the Effective Time.

     (f) Except as disclosed on SCHEDULE 5.15: (i) all Patent Rights and
registrations for Intellectual Property identified as being owned by the Company
are valid and in force, and all applications to register any unregistered
Intellectual Property are pending and in good standing, all without challenge of
any kind; (ii) the Intellectual Property owned by the Company is valid and
enforceable; and (iii) the Company has the sole and exclusive right to bring
actions for infringement or unauthorized use of the Intellectual Property and
Software owned by the Company, and to the best knowledge of the Company, there
is no basis for any such action. Correct and complete copies of: (x)
registrations for all registered copyrights, trademarks, trade names, service
marks and patents identified as being owned by the Company; (y) all pending
applications to register unregistered Intellectual Property (together with any
subsequent correspondence or filings relating to the foregoing); and (z) all
items identified in SECTION 5.15(c), have heretofore been delivered by the
Company to Parent.

     (g) Except as disclosed in SCHEDULE 5.15, no infringement of any copyright,
trademark, service mark, trade name, patent, patent right, trade secret or other
property right of any other Person has occurred or results in any way from the
operations of the

                                      -26-
   32

Company's business. No claim of any infringement of any copyright, trademark,
service mark, trade name, patent, patent right, trade secret or other property
right of any other Person has been made or asserted in respect of the operations
of the Company's Business. The Company has not had notice of, or knowledge of
any basis for, a claim against the Company that its operations, activities,
products, software, equipment, machinery or processes of the Company's business
infringe any copyright, trademark, service mark, trade name, patent, patent
right, trade secret or other property right of any other Person.

     (h) Except as disclosed on SCHEDULE 5.15: (i) the Software is not subject
to any transfer, assignment, site, equipment, or other operational limitations;
(ii) the Company has maintained and protected the Software it owns (the "OWNED
SOFTWARE") (including, without limitation, all source code and system
specifications) with appropriate proprietary notices (including, without
limitation, the notice of copyright in accordance with the requirements of 17
U.S.C. sec. 401), confidentiality and non-disclosure agreements and such other
measures as are necessary to protect the proprietary, trade secret or
confidential information contained therein; (iii) the Owned Software has been
registered or is eligible for protection and registration under applicable
copyright law and has not been forfeited to the public domain; (iv) the Company
has copies of all releases or separate versions of the Owned Software so that
the same may be subject to registration in the United States Copyright Office;
(v) the Company has complete and exclusive right, title and interest in and to
the Owned Software; (vi) the Company has developed the Owned Software through
its own efforts and for its own account without the aid or use of any
consultants, agents, independent contractors or Persons (other than Persons that
are employees of the Company); (vii) the Owned Software does not infringe any
copyright, trademark, service mark, trade name, patent, patent right, trade
secret or other property right of any other Person; (viii) any Owned Software
includes the source code, system documentation, statements of principles of
operation and schematics, as well as any pertinent commentary, explanation,
program (including compilers), workbenches, tools, and higher level or
proprietary language used for the development, maintenance, implementation and
use thereof, so that a trained computer programmer could develop, maintain,
support, compile and use all releases or separate versions of the same that are
currently subject to maintenance obligations by the Company; (ix) there are no
agreements or arrangements in effect with respect to the marketing,
distribution, licensing or promotion of the Owned Software by any other Person;
(x) the Owned Software complies with all applicable Requirements of Laws
relating to the export or reexport of the same; and (xi) the Owned Software may
be exported or reexported to all countries without the necessity of any license,
other than to those countries specified as prohibited destinations pursuant to
applicable regulations of the U.S. Department of Commerce and/or the United
States State Department.

     (i) Except as disclosed on SCHEDULE 5.15, all employees, agents,
consultants, or contractors who have contributed to or participated in the
creation or development of any copyrightable, patentable or trade secret
material on behalf of the Company or any predecessor in interest thereto either:
(i) is a party to a "work-for-hire" agreement under which the Company is deemed
to be the original owner/author of all property rights therein; or (ii) has
executed an assignment or an agreement to assign in

                                      -27-
   33

favor of the Company (or such predecessor in interest, as applicable) of all
right, title and interest in such material.

5.16. TITLE TO PROPERTY. The Company has good and marketable title in fee simple
absolute to all Owned Real Property and to all buildings, structures and other
improvements thereon, in each case free and clear of all Encumbrances, except
for Permitted Encumbrances and except as set forth in SCHEDULE 5.16. The Company
has good title to all of its other assets reflected on the Balance Sheet as
being owned by it and all of the assets thereafter acquired by it (except to the
extent that such assets have been disposed of after the Balance Sheet Date in
the ordinary course of business consistent with past practice), free and clear
of all Encumbrances, except for Permitted Encumbrances and except as set forth
in SCHEDULE 5.16. Except as set forth on SCHEDULE 5.16, the Company has
fulfilled and performed in all material respects all its obligations, and all
obligations binding upon any Owned Real Property, under each of the Encumbrances
to which any Owned Real Property is subject, and neither the Company nor any
Owned Real Property is in breach or default under, or in violation of or
noncompliance with, any such Encumbrances, and no event has occurred and no
condition or state of facts exists which, with the passage of time or the giving
of notice or both, would constitute such a breach, default, violation or
noncompliance. The consummation of the transactions contemplated by this
Agreement will not result in any breach, default, violation, noncompliance or
forfeiture or impairment of any rights under any Encumbrance to which any Owned
Real Property is subject, or require any consent, approval or act of, or the
making of any filing with, any other party to or benefited by or holding rights
under or with respect to any such Encumbrance.

5.17.    EMPLOYEE BENEFIT PLANS.

     (a) Set forth in SCHEDULE 5.17(A) is a true and complete list of each
"employee pension benefit plan" (as such term is defined in SECTION 3(2) of
ERISA) maintained by the Company or an ERISA Affiliate, or with respect to which
the Company or an ERISA Affiliate is or will be required to make any payment, or
which provides or will provide benefits to present or prior employees of the
Company or an ERISA Affiliate due to such employment (the "PENSION PLANS"). Set
forth in SCHEDULE 5.17(A) is a true and complete list of each "employee welfare
benefit plan" (as such term is defined in SECTION 3(1) of ERISA) maintained by
the Company, or with respect to which the Company is or will be required to make
any payment, or which provides or will provide benefits to present or prior
employees of the Company due to such employment (the "WELFARE PLANS") (the
Pension Plans and Welfare Plans being the "ERISA BENEFIT PLANS"). In addition,
set forth in SCHEDULE 5.17(A) is a true and complete list of each other
"employee pension benefit plan" (as such term is defined in SECTION 3(2) of
ERISA) that is or has ever been subject to SECTION 302 of ERISA and (i)
maintained by the Company or an ERISA Affiliate at any time during the six-year
period prior to the Effective Time, or (ii) with respect to which the Company or
an ERISA Affiliate was required to make any payment at any time during such
period (the "PRIOR PENSION PLANS").

                                      -28-
   34

     (b) Other than those listed in SCHEDULE 5.17(A), set forth in Schedule
5.17(B) is a true and complete list of each of the following to which the
Company is a party or with respect to which it is or will be required to make
any payment (the "NON-ERISA COMMITMENTS"):

          (i) each retirement, savings, profit sharing, deferred compensation,
     severance, stock ownership, stock purchase, stock option, performance,
     bonus, incentive, vacation or holiday pay, hospitalization or other
     medical, disability, life or other insurance, or other welfare, benefit or
     fringe benefit plan, policy, trust, understanding or arrangement of any
     kind, whether written or oral; and

          (ii) each employee collective bargaining agreement and each agreement,
     understanding or arrangement of any kind, whether written or oral, with or
     for the benefit of any present or prior officer, director, employee, agent
     or consultant (including, without limitation, each employment,
     compensation, deferred compensation, severance or consulting agreement or
     arrangement, confidentiality agreement, covenant not to compete and any
     agreement or arrangement associated with a change in ownership or control
     of the Company, but excluding employment agreements terminable by the
     Company without premium or penalty on notice of thirty (30) days or less
     under which the only monetary obligation of the Company is to make current
     wage or salary payments and provide current fringe benefits).


The Company has delivered to Parent correct and complete copies of (i) all
written Non-ERISA Commitments and (ii) all insurance and annuity policies and
contracts and other documents relevant to any Non-ERISA Commitment. SCHEDULE
5.17(B) contains a complete and accurate description of all oral Non-ERISA
Commitments. Except as disclosed in SCHEDULE 5.17(A) or SCHEDULE 5.17(B), none
of the ERISA Benefit Plans or the Non-ERISA Commitments is subject to the law of
any jurisdiction outside of the United States of America.

     (c) Except as set forth on SCHEDULE 5.17(C), neither the Company nor any
ERISA Affiliate is a party to or is bound by any "multiemployer plan" (as such
term is defined in SECTION 3(37) OF ERISA). The Company has delivered to Parent
with respect to each ERISA Benefit Plan and with respect to each Prior Pension
Plan, other than any ERISA Benefit Plan or Prior Pension Plan which is a
multiemployer plan (as such term is defined in SECTION 3(37) of ERISA), correct
and complete copies, where applicable, of (i) all plan documents and amendments
thereto, trust agreements and amendments thereto and insurance and annuity
contracts and policies, (ii) the current summary plan description, (iii) the
Annual Reports (Form 5500 series) and accompanying schedules, as filed, for the
most recently completed three plan years for which such reports have been filed,
(iv) the financial statements for the most recently completed three plan years
for which such statements have been prepared, (v) the actuarial reports for the
most recently begun three plan years for which such reports exist, (vi) the most
recent determination letter issued by the IRS and the application submitted with
respect to

                                      -29-
   35

such letter, (vii) PBGC Form 1 for the most recently begun plan year and (H) all
correspondence with the IRS, Department of Labor and Pension Benefit Guaranty
Corporation concerning any controversy. Each report described in clause (v) of
the preceding sentence accurately describes the funded status of the plan to
which it relates and subsequent to the date of such report there has been no
adverse change in the funding status or financial condition of such plan. The
Company has no Pension Plans that are "multiemployer plans" (the "MULTIEMPLOYER
PLANS").

     (d) The Company has no Pension Plans that are subject to SECTION 302 of
ERISA. Each Pension Plan which is intended to qualify under SECTION 401(a) of
the Code either (x) has been determined to be so qualified by the IRS, (y) may
rely on an opinion letter issued to a prototype plan sponsor with respect to a
standardized plan adopted by the Company in accordance with the requirements for
such reliance, or (z) has applied to the IRS for such a determination letter (or
has time remaining to apply for such a determination letter) prior to the
expiration of the remedial amendment period under SECTION 401(b) of the Code
under applicable Treasury Regulations or IRS pronouncements, and no circumstance
has occurred or exists which might cause such plan to cease being so qualified.

     (e) There is no pending or, to the best knowledge of the Company,
threatened claim in respect of any of the ERISA Benefit Plans other than claims
for benefits in the ordinary course of business. Except as set forth in SCHEDULE
5.17(E), each of the ERISA Benefit Plans other than any Multiemployer Plans (i)
has been administered in all material respects in accordance with its terms and
(ii) complies in form, and has been administered in all material respects in
accordance, with the requirements of ERISA and, where applicable, the Code. The
Company and each ERISA Affiliate has complied all material respects with the
health care continuation requirements of Part 6 of Title I of ERISA and Sections
4980B through 4980D of the Code. Except as set forth in SCHEDULE 5.17(E), the
Company has no obligation under any ERISA Benefit Plans or otherwise to provide
health or other welfare benefits to any prior employees or any other person,
except as required by Part 6 of Title I of ERISA. The consummation of the
transaction contemplated by this Agreement will not result in an increase in the
amount of compensation or benefits or accelerate the vesting or timing of
payment of any compensation or benefits payable to or in respect of any
participant. The Company is in compliance with the requirements of the Workers
Adjustment and Retraining Notification Act ("WARN") and has no liabilities
pursuant to WARN.

     (f) Except as to Multiemployer Plans (as to which this representation and
warranty is made only to the best knowledge of the Company), neither the Company
nor, to the best knowledge of the Company, any other "disqualified person"
(within the meaning of SECTION 4975 of the Code) or "party in interest" (within
the meaning of SECTION 3(14) of ERISA) has taken any action with respect to any
ERISA Benefit Plan which could subject any such plan (or its related trust) or
the Company or any officer, director or employee of any of the foregoing to the
penalty or tax under SECTION 502(i) or SECTION 502(l) of ERISA or SECTION 4975
of the Code.

                                      -30-
   36

     (g) The Company has no potential liability, whether direct or indirect,
contingent or otherwise, under SECTION 4063, 4064, 4069, 4204 or 4212(c) of
ERISA.

     (h) SCHEDULE 5.17(l) contains: (i) a list of all employees or commission
salespersons of the Company as of June 30, 2000; (ii) the then current annual
compensation of, and a description of the fringe benefits (other than those
generally available to employees of the Company) provided by the Company to any
such employees or commission salespersons; and (iii) a list of all present or
former employees or commission salespersons of the Company who have terminated
or given notice of their intention to terminate their relationship with the
Company since January 1, 2000.

     (i) For purposes of this Agreement, "ERISA AFFILIATE" means (i) any
corporation which at any time on or before the Effective Time is or was a member
of the same controlled group of corporations (within the meaning of SECTION
414(b) of the Code) as the Company; (ii) any partnership, trade or business
(whether or not incorporated) which at any time on or before the Effective Time
is or was under common control (within meaning of SECTION 414(c) of the Code)
with the Company; and (iii) any entity which at any time on or before the
Effective Time is or was a member of the same affiliated service group (within
the meaning of SECTION 414(m) of the Code) as either the Company, any
corporation described in clause (i) of this paragraph or any partnership, trade
or business described in clause (ii) of this paragraph. An "ASSOCIATE" of any
Person means (i) a corporation or organization of which such Person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10
percent or more of any class of equity securities, (ii) any trust or other
estate in which such Person has a substantial beneficial interest or as to which
such Person serves as trustee or in a similar fiduciary capacity and (iii) any
relative or spouse of such Person, or any relative of such spouse, who has the
same home as such Person or who is a director or officer of the Person or any of
its parents or subsidiaries.

     (j) Except as set forth in SCHEDULE 5.17(K), (i) to the best knowledge of
the Company and each of the Stockholders, the Company is not involved in any
transaction or other situation with any employee, officer, director or Affiliate
of the Company which may be generally characterized as a "conflict of interest",
including, but not limited to, direct or indirect interests in the business of
competitors, suppliers or customers of the Company, and (ii) there are no
transactions with respect to the Company which involved or involves (A) the use
of any corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to political activity, (B) the making of any direct or
indirect unlawful payments to government officials or others from corporate
funds or the establishment or maintenance of any unlawful or unrecorded funds,
(C) the violation of any of the provisions of The Foreign Corrupt Practices Act
of 1977, or any rules or regulations promulgated thereunder, (D) the receipt of
any illegal discounts or rebates or any other violation of the antitrust laws or
(E) any investigation by the Securities and Exchange Commission or any other
federal, foreign, state or local government agency or authority.

                                      -31-
   37

     5.18. EMPLOYEE RELATIONS. The Company has complied in all material respects
with all applicable federal, state and local laws, rules and regulations which
relate to prices, wages, hours, employment and/or discrimination in employment
and collective bargaining and to the operation of its business and is not liable
for any arrears of wages or any taxes or penalties for failure to comply with
any of the foregoing. The Company believes that the Company's relations with its
employees are satisfactory. Except as set forth in SCHEDULE 5.17(B), the Company
is not a party to any collective bargaining agreement, the Company has complied
in all material respects with all collective bargaining agreements listed in
such Schedule and the Company is not a party to, and it is not affected by or
threatened with, any dispute or controversy with a union or with respect to
unionization or collective bargaining involving its employees. The Company is
not materially affected by any dispute or controversy with a union or with
respect to unionization or collective bargaining involving any supplier or
customer of the Company. SCHEDULE 5.18 sets forth a description of any union
organizing or election activities involving any non-union employees of the
Company which have occurred since the Balance Sheet Date or, to the best
knowledge of the Company, are threatened as of the date hereof.

     5.19. CONTRACTS; PRODUCT WARRANTIES. Except as set forth in SCHEDULE 5.19
or any other Schedule hereto, the Company is not a party to or bound by:

          (i) any contract for the purchase, sale or lease of real property;

          (ii) any contract for the purchase of raw materials which the Company
     reasonably anticipates will involve the payment of more than $10,000 in
     2000 or which extends beyond December 31, 2000;

          (iii) any contract for the sale of goods or services which the Company
     reasonably anticipates will involve the payment of more than $10,000 in
     2000 or which extends beyond December 31, 2000;

          (iv) any consignment, distributor, dealer, manufacturers
     representative, sales agency, advertising representative or advertising or
     public relations contract which involved the payment of more than $10,000
     in 1999, which the Company reasonably anticipates will involve the payment
     of more than $10,000 in 2000 or which extends beyond December 31, 2000;

          (v) any guarantee of the obligations or liabilities of customers,
     suppliers, officers, directors, employees, Affiliates of the Company or
     others;

          (vi) any agreement which provides for, or relates to, the incurrence
     by the Company of debt for borrowed money or the extension of credit (other
     than in the ordinary course of business consistent with past practice) by
     the Company to any other Person;

                                      -32-
   38

          (vii) any agreement or understanding with a third Person that
     restricts the Company from carrying on its business anywhere in the world;

          (viii) any contract which provides for, or relates to, any
     non-competition or confidentiality arrangement with any Person, including
     any current or former officer or employee of the Company;

          (ix) except as set forth in the budgets included in SCHEDULE 5.25, any
     contract or group of related contracts for capital expenditures in excess
     of $50,000 for any single project or related series of projects;

          (x) any partnership, joint venture or other similar arrangement or
     agreement involving a sharing of profits or losses;

          (xi) any contract which involves payments or receipts by the Company
     of more than $50,000;

          (xii) any contract not made in the ordinary course; or

          (xiii) any contract for any purpose (whether or not made in the
     ordinary course of the business or otherwise not required to be listed or
     described in SCHEDULE 5.19) which is material to the Company or its
     business.


     SCHEDULE 5.19 also contains a list and description of each express warranty
given or offered by the Company prior to the date hereof covering any class or
group of products sold or distributed by the Company and other express
warranties covering any material product sold or distributed by the Company, in
each case which warranty is in effect on the date hereof or will be in effect on
the Effective Date. The reserve for liabilities with respect to warranty claims
contained in the Balance Sheet fairly reflects in all material respects the
amount required in accordance with generally accepted accounting principles to
be shown thereon as of the Balance Sheet Date and the reserve for such
liabilities to be contained in the books and records of the Company on the
Effective Date will fairly reflect in all material respects the amount required
in accordance with generally accepted accounting principles to be shown thereon
as of the Effective Date.

     5.20. STATUS OF CONTRACTS. Except as set forth in the Schedules attached
hereto, each of the leases, contracts and other agreements listed in SCHEDULES
5.11, 5.14, 5.15, 5.17 and 5.19 (collectively, the "COMPANY AGREEMENTS")
constitutes a valid and binding obligation of the parties thereto and is in full
force and effect and (except as set forth in SCHEDULE 5.3 and except for those
Company Agreements which by their terms will expire prior to the Effective Time
or are otherwise terminated prior to the Effective Time in accordance with the
provisions hereof) will continue in full force and effect after the Effective
Time, in each case without breaching the terms thereof or resulting in the
forfeiture or impairment of any rights thereunder and without the consent,
approval or act of, or the making of any filing with, any other party. The

                                      -33-
   39

Company has fulfilled and performed in all material respects its obligations
under each of the Company Agreements, and the Company is not in, or alleged to
be in, breach or default under, nor is there or is there alleged to be any basis
for termination of, any of the Company Agreements and, to the best knowledge of
the Company, no other party to any of the Company Agreements has breached or
defaulted thereunder, and no event has occurred and no condition or state of
facts exists which, with the passage of time or the giving of notice or both,
would constitute such a default or breach by the Company or, to the best
knowledge of the Company, by any such other party. The Company is not currently
renegotiating any of the Company Agreements or paying liquidated damages in lieu
of performance thereunder. None of the Company Agreements contains terms unduly
burdensome to the Company or is harmful to its business. Complete and correct
copies of each of the Company Agreements have heretofore been delivered to
Parent.

     5.21. NO VIOLATION, LITIGATION OR REGULATORY ACTION. Except as set forth in
SCHEDULE 5.21:

          (i) the Company's assets and their uses comply with all applicable
     Requirements of Laws and Court Orders;

          (ii) the Company has complied with all Requirements of Laws and Court
     Orders which are applicable to the Company's assets or its business;

          (iii) there are no lawsuits, claims, suits, proceedings or
     investigations pending or, to the best knowledge of the Company or the
     Shareholder Representative, threatened against or affecting the Company or
     its assets or business nor, to the best knowledge of the Company, is there
     any basis for any of the same, and there are no lawsuits, suits or
     proceedings pending in which the Company is the plaintiff or claimant;

          (iv) there is no action, suit or proceeding pending or, to the best
     knowledge of the Company, threatened which questions the legality or
     propriety of the transactions contemplated by this Agreement; and

          (v) to the best knowledge of the Company, no United States federal or
     state legislative or regulatory proposal has been adopted or is pending
     which could adversely affect the Company's business in any material
     respect.


The Company and its officers and directors are fully insured for those matters
set forth on SCHEDULE 5.21.

     5.22. ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 5.22:

                                      -34-
   40

          (i) the Company's past and present operations of the Company's
     business have complied and are in compliance with all applicable
     Environmental Laws;

          (ii) the Company obtained all environmental, health and safety
     Governmental Permits necessary for the operation of its business, and all
     such Governmental Permits are in good standing and the Company is in
     compliance with all terms and conditions of such permits;

          (iii) (A) none of the Company, nor any of the Company Properties or
     its past or present operations, is subject to any on-going investigation
     by, order from or agreement with any Person (including without limitation
     any prior owner or operator of any Company Property) respecting (x) any
     Environmental Law, (y) any Remedial Action or (z) any claim of Losses and
     Expenses arising from the Release or threatened Release of a Contaminant
     into the environment and (B) there is not any Release of any Contaminant
     on, to, at or under any Company Property; (iv) the Company is not subject
     to any judicial or administrative proceeding, order, judgment, decree or
     settlement alleging or addressing a violation of or liability under any
     Environmental Law;

          (v) the Company has not:

               1.   reported a Release of a hazardous substance pursuant to
                    SECTION 103(a) of CERCLA, or any state equivalent;

               2.   filed a notice pursuant to SECTION 103(c) of CERCLA;

               3.   filed notice pursuant to SECTION 3010 of RCRA, indicating
                    the generation of any hazardous waste, as that term is
                    defined under 40 CFR Part 261 or any state equivalent; or

               4.   filed any notice under any applicable Environmental Law
                    reporting a substantial violation of any applicable
                    Environmental Law;

          (vi) there is not now, nor to the best knowledge of the Company has
     there ever been, on or in any Company Property:

               1.   any treatment, recycling, storage or disposal of any
                    hazardous waste, as that term is defined under 40 CFR Part
                    261 or any state equivalent that requires or required a
                    Governmental Permit pursuant to SECTION 3005 of RCRA; or

               2.   any underground storage tank or surface impoundment or
                    landfill or waste pile.

                                      -35-
   41

          (vii) to the best knowledge of the Company, there is not now on or in
     any Company Property any polychlorinated biphenyls (PCB) used in pigments,
     hydraulic oils, electrical transformers or other equipment;

          (viii) the Company has not received any notice or claim to the effect
     that it is or may be liable to any Person as a result of the Release or
     threatened Release of a Contaminant into the environment on any Company
     Property or generated by the Company;

          (ix) no Company Property has been listed or, to the best knowledge of
     the Company, proposed for listing on the National Priorities List pursuant
     to CERCLA, on the Comprehensive Environmental Response, Compensation and
     Liability Information System List or any state list of sites requiring
     Remedial Action;

          (x) the Company has not sent or arranged for the transport of any
     Contaminant to any site listed on the National Priorities List pursuant to
     CERCLA or that otherwise could give rise to liability on the part of the
     Company for Remedial Action, Losses or Expenses;

          (xi) no Environmental Encumbrance has attached to any Company
     Property;

          (xii) to the best knowledge of the Company, any asbestos-containing
     material which is on or part of any Company Property (excluding any raw
     materials used in the manufacture of products or products themselves) is in
     good repair according to the current standards and practices governing such
     material, and its presence or condition does not violate any currently
     applicable Environmental Law; and

          (xiii) none of the products that the Company manufactures, distributes
     or sells in connection with its business, now or in the past, contains
     asbestos or asbestos-containing material.

     5.23. INSURANCE. The Company maintains policies of fire and casualty,
liability (general, products and other liability), workers' compensation and
other forms of insurance and bonds in such amounts and against such risks and
losses as are insured against by companies engaged in the same or a similar
business. SCHEDULE 5.23 sets forth a list and brief description (including
nature of coverage, limits, deductibles, premiums and the loss experience for
the most recent five years with respect to each type of coverage) of all
policies of insurance maintained, owned or held by the Company during the period
from January 1, 1999 up to and including on the date hereof. The Company shall
keep or cause such insurance or comparable insurance in full force and effect
through the Effective Date. The Company has complied with each of such insurance
policies and has not failed to give any notice or present any claim thereunder
in a due and timely manner. Except as disclosed in SCHEDULE 5.23, the full
policy limits (subject to deductibles provided in such policies) are available
and

                                      -36-
   42

unimpaired under each such policy and to the best knowledge of the Company, no
insurer under any of such policies has a basis to void such policy on grounds of
non-disclosure on the part of the policyholder or the insured thereunder. Each
of such policies is in full force and effect and will not in any way be affected
by or terminate or lapse by reason of the transactions contemplated by this
Agreement. The Company has delivered to Parent correct and complete copies of
the most recent inspection reports, if any, received from insurance underwriters
as to the condition of the Company's assets.

     5.24. CUSTOMERS AND SUPPLIERS. Set forth in SCHEDULE 5.24 hereto is (i) a
list of names and addresses of the ten largest customers and the ten largest
suppliers (measured by dollar volume of purchases or sales in each case) of the
Company and the percentage of the Company's business which each such customer or
supplier represents or represented during 1999 and the period January 1, 2000
through June 30, 2000; and (ii) copies of the forms of purchase order for
inventory and other supplies and sales contracts for finished goods used by the
Company. Except as set forth in SCHEDULE 5.24, there exists no actual or, to the
best knowledge of the Company, threatened termination, cancellation or
limitation of, or any modification or change in, the business relationship of
the Company with any customer or group of customers listed in SCHEDULE 5.24, or
whose purchases individually or in the aggregate are material to the operations
of the Company's business, or with any supplier or group of suppliers listed in
SCHEDULE 5.24, or whose sales individually or in the aggregate are material to
the operations of the Company's business, and there exists no present or future
condition or state of facts or circumstances involving customers, suppliers or
sales representatives which the Company can now reasonably foresee would
materially adversely affect the Company's business or prevent the conduct of
such business after the consummation of the transactions contemplated by this
Agreement in essentially the same manner in which it has heretofore been
conducted.

     5.25. BUDGETS. SCHEDULE 5.25 sets forth (a) as of the date hereof the
budgets of capital, payroll and other expenditures of the Company prepared in
the ordinary course of its business for the fiscal year ending December 31, 2000
and (b) the total capital expenditures through June 30, 2000, if any, for each
capital expenditure project for which funds are proposed to be expended during
2000.

5.26. CONSENT MATERIALS. The materials (collectively, the "CONSENT MATERIALS")
to be prepared by the Company in accordance with SECTION 7.1 and used in
connection with obtaining approval by the Shareholders of the Merger, this
Agreement and the transaction contemplated hereby (the "SHAREHOLDER CONSENT")
will, when prepared by the Company and distributed to the Shareholders, comply
in all material respects with the provisions of the WBCA and will not, at the
time of the mailing of the Consent Materials, at the time the Company obtains
Shareholder Consent or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading; PROVIDED, that the
Company makes no representation with respect to information concerning Parent
supplied by Parent to the Company for inclusion in the Consent Materials.

                                      -38-
   43

     5.27. REQUIRED VOTE OF SHAREHOLDERS. The affirmative vote of the holders of
(i) a majority of the outstanding shares of Company Common Stock and (ii)
two-thirds (2/3) of the outstanding shares of Preferred Stock is required to
approve this Agreement. The affirmative vote of two-thirds (2/3) of the
outstanding shares of Preferred Stock is required to effect the automatic
conversion of all of the shares of Preferred Stock into Common Stock. No other
vote of the Shareholders is required by law, the Company's Articles of
Incorporation or Bylaws or otherwise in order for the Company to consummate the
Merger and the transactions contemplated by this Agreement.

     5.28. NO FINDER. Neither the Company nor any Person acting on behalf of the
Company has paid or become obligated to pay any fee or commission to any broker,
finder or intermediary for or on account of the transactions contemplated by
this Agreement, other than to H & Q, whose fees and expenses will be deducted
from the Purchase Price. Complete and correct copies of the engagement and
indemnification agreements entered into with H & Q have been furnished to
Parent.

     5.29. ULTIMATE PARENT ENTITY. The Company is the only "ultimate parent
entity" (as defined in 16 C.F.R. Sec. 801.1(a)(3) (1999)) of the Company. The
"person" (as defined in 16 C.F.R. Sec. 801.1(a)(1) (1999)) of which the Company
is the "ultimate parent entity" does not have "annual net sales" (as defined in
16 C.F.R. Sec. 801.11 (1999)) or "total assets" (as defined in 16 C.F.R.
Sec. 801.11 (1999)) of $10 million or more.

     5.30. DISCLOSURE. None of the representations or warranties of the Company
and the Shareholders Representative contained herein and none of the information
contained in the Schedules referred to in this ARTICLE V or in the opinion
referred to SECTION 9.11 is false or misleading in any material respect or omits
to state a fact herein or therein necessary to make the statements herein or
therein not misleading in any material respect.

                                   ARTICLE VI

              REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGERCO


         As an inducement to the Company and the Shareholder Representative to
enter into this Agreement and to consummate the transactions contemplated
hereby, Parent and Mergerco hereby jointly and severally represent and warrant
to the Company and the Shareholder Representative and agree as follows:

     6.1. ORGANIZATION AND CAPITAL STRUCTURE. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has full corporate power and authority to own or lease and to
operate and use its properties and assets and to carry on its business as now
conducted. Mergerco is a corporation duly organized and validly existing under
the laws of the State of Washington. Mergerco was organized solely for the
purpose of engaging in the transactions contemplated by this Agreement and has
not engaged in any business since it was incorporated which is not in connection
with this Agreement.


                                      -39-
   44

     The authorized capital of Mergerco consists of 1,000 share of Company
Common Stock, par value $.01 per share, of which 1,000 have been issued and are
outstanding and none are held as treasury shares. All of the outstanding shares
of capital stock of Mergerco are validly issued, fully paid and nonassessable
and owned of record and beneficially by Parent, free from all Encumbrances.

     6.2. AUTHORITY. Parent has full corporate power and authority to execute,
deliver and perform this Agreement and all of the Parent Ancillary Agreements.
The execution, delivery and performance of this Agreement and the Parent
Ancillary Agreements by Parent have been duly authorized, approved and adopted
by Parent's board of directors and, except for the approval of this Agreement by
Parent as the sole shareholder of Mergerco in accordance with SECTION 7.2, no
other corporate proceedings on the part of Parent are necessary to authorize
this Agreement, the Parent Ancillary Agreements and the transactions
contemplated hereby and thereby. This Agreement has been duly authorized,
executed and delivered by Parent and is the legal, valid and binding obligation
of Parent enforceable in accordance with its terms and each of the Parent
Ancillary Agreements has been duly authorized by Parent and upon execution and
delivery by Parent will be a legal, valid and binding obligation of Parent
enforceable in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and by the
effect of general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).


     Mergerco has full corporate power and authority to execute, deliver and
perform this Agreement. The execution, delivery and performance of this
Agreement by Mergerco have been duly authorized, approved and adopted by
Mergerco's board of directors and, except for the approval of this Agreement by
Parent in accordance with SECTION 7.2 and the filing contemplated by SECTION
4.2, no other corporate proceedings on the part of Mergerco are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by Mergerco and is
the legal, valid and binding agreement of Mergerco enforceable in accordance
with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by the effect of general
principles of equity (regardless of whether enforcement is considered in a
proceeding in equity or at law).


     Neither the execution and delivery of this Agreement or any of the Parent
Ancillary Agreements or the consummation of any of the transactions contemplated
hereby or thereby nor compliance with or fulfillment of the terms, conditions
and provisions hereof or thereof will:

          (i) conflict with, result in a breach of the terms, conditions or
     provisions of, or constitute a default, an event of default or an event
     creating rights of acceleration, termination or cancellation or a loss of
     rights under, or result in the creation or imposition of any Encumbrance

                                      -40-
   45
     upon any of Parent's or Mergerco's assets under, (1) the Certificate of
     Incorporation of Parent, the Articles of Incorporation of Mergerco, or the
     Bylaws of Parent or Mergerco, (2) any material note, instrument, agreement,
     mortgage, lease, license, franchise, permit or other authorization, right,
     restriction or obligation to which either Parent or Mergerco is a party or
     any of their respective assets or business is subject or by which either
     Parent or Mergerco is bound, (3) any Court Order to which either Parent or
     Mergerco is a party or by which either Parent or Mergerco is bound or (4)
     any Requirements of Laws affecting Parent or Mergerco, except for, in the
     case of clauses (2) or (3) of this subparagraph (ii), any such conflicts,
     breaches, defaults, rights or Encumbrances that, individually or in the
     aggregate, would not have a Material Adverse Effect on Parent and its
     subsidiaries, taken as a whole, materially impair the ability of Parent to
     perform its obligations hereunder or prevent the consummation of any of the
     transactions contemplated hereby; or

          (ii) require the approval, consent, authorization or act of, or the
     making by either Parent or Mergerco of any declaration, filing or
     registration with, any Person, except for the filing contemplated by
     SECTION 4.2.

     6.3. INFORMATION SUPPLIED BY PARENT FOR CONSENT MATERIALS. None of the
information supplied by Parent in writing for inclusion in the Consent Materials
will, at the time of the mailing of the Consent Materials, at the time of the
Shareholder Meeting or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.

     6.4. NO FINDER. Neither Mergerco or Parent nor any Person acting on behalf
of Mergerco or Parent has paid or become obligated to pay any fee or commission
to any broker, finder or intermediary for or on account of the transactions
contemplated by this Agreement.

                                  ARTICLE VII

                       ACTION PRIOR TO THE EFFECTIVE TIME

     The respective parties hereto covenant and agree to take the following
actions between the date hereof and the Effective Time:

     7.1. ACTION BY THE COMPANY; SHAREHOLDER MEETING AND PREPARATION OF THE
CONSENT MATERIALS.

     (a)  The Company shall prepare the Consent Materials as promptly as
possible after the date hereof and shall submit the proposed Consent Materials
to Parent and its counsel not less than five days prior to submitting the
Consent Materials


                                      -41-
   46


to the Shareholders. Parent shall furnish the Company with such information
concerning Parent as shall be required to be included in the Consent Materials.
The Company shall use commercially reasonable best efforts to mail the Consent
Materials to Shareholders on or before August 4, 2000. If prior to the Effective
Time either (i) the Company determines that the Consent Materials need to be
amended or supplemented in order for the representation and warranty of the
Company in SECTION 5.26 to be correct or (ii) Parent determines that the Consent
Materials need to be amended or supplemented in order for the representation and
warranty of Parent and Mergerco in SECTION 6.3 to be correct, the Company or
Parent, as the case may be, shall notify the other of such determination and
shall deliver to the other such amendment or supplement as such party believes
is necessary to make such representation and warranty correct. The Company shall
consider all such amendments proposed by Parent, and shall cause all such
amendments or supplements that the parties reasonably believe are necessary to
be mailed to the Shareholders as soon as practicable after such delivery.

     (b)  The Company shall properly obtain from the Shareholders (1) approval
of the Merger and this Agreement and (2) in the case of the Preferred Stock
Holders, the necessary approval to effect the automatic conversion, immediately
prior to the consummation of the Merger, of all of the shares of Preferred Stock
into shares of Company Common Stock. The Company will, through its Board of
Directors, recommend to the Shareholders the approval of this Agreement as
required by (i) the Articles of Incorporation and Bylaws of the Company
(including the approval and adoption by the Preferred Stock Holders) and (ii)
the WBCA. The Company shall use commercially reasonable best efforts to obtain
such approvals on or before August 25, 2000.

     7.2. ACTION BY PARENT. Parent, as the sole shareholder of Mergerco, shall
take such actions as may be necessary to approve the Merger and this Agreement
as required by the WBCA.

     7.3. INVESTIGATION OF THE COMPANY BY PARENT. The Company shall afford to
the officers, employees and authorized representatives of Parent (including,
without limitation, its independent public accountants, attorneys, environmental
consultants and financial advisors) complete access during normal business hours
to the offices, properties, employees and business and financial records
(including, without limitation, computer files, retrieval programs and similar
documentation) of the Company to the extent Parent shall deem necessary or
desirable, and shall furnish to Parent or its authorized representatives such
additional information concerning the operations, properties and business of the
Company as may be reasonably requested to enable Parent or its representatives
to verify the accuracy of the representations and warranties contained in this
Agreement, to verify that the covenants of the Company and the Shareholder
Representative contained in this Agreement have been complied with and to
determine whether the conditions set forth in ARTICLE IX have been satisfied.
Parent agrees that such investigation shall be conducted in such a manner as not
to interfere unreasonably with the operations of the Company. Without limiting
the foregoing, the Company shall permit Parent, or its representatives, to
conduct an


                                      -42-
   47


environmental audit of any of the Owned Real Property or the Leased Real
Property with respect to any environmental health and safety issues deemed
material by Parent. No investigation made by Parent or its representatives
hereunder shall affect the representations and warranties of the Shareholder
Representative hereunder.

     7.4. PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the
parties hereto shall refrain from taking any action which would render any
representation or warranty contained in ARTICLE V or VI of this Agreement
inaccurate as of the Effective Time. Each party shall promptly notify the other
parties of any action, suit or proceeding that shall be instituted or threatened
against such party to restrain, prohibit or otherwise challenge the legality of
any transaction contemplated by this Agreement. The Company shall promptly
notify Parent of any lawsuit, claim, proceeding or investigation that may be
instituted or threatened against the Company which would have been listed in
SCHEDULE 5.22 if such lawsuit, claim, proceeding or investigation had arisen
prior to the date hereof.

     7.5. CONSENTS OF THIRD PARTIES; GOVERNMENTAL APPROVALS.

     (a)  The Company will act diligently and reasonably to secure, before the
Effective Time, the consent, approval or waiver, in form and substance
reasonably satisfactory to Parent, from any party to any Company Agreement
required to satisfy the conditions set forth in SECTION 9.5; PROVIDED that no
party hereto shall have any obligation to offer or pay any consideration in
order to obtain any such consents or approvals; and PROVIDED, FURTHER, that the
Company shall not make any agreement or understanding affecting the Company or
its assets or business as a condition for obtaining any such consents or waivers
except with the prior written consent of Parent. During the period prior to the
Effective Time, Parent shall act diligently and reasonably to cooperate with the
Company to obtain the consents, approvals and waivers contemplated by this
SECTION 7.5(a).

     (b)  During the period prior to the Effective Time, the parties hereto
shall act diligently and reasonably, and shall cooperate with each other, to
secure any consents and approvals of any Governmental Body required to be
obtained by them in order to permit the consummation of the transactions
contemplated by this Agreement or to otherwise satisfy the conditions set forth
in SECTION 9.4; PROVIDED that the Company shall not make any agreement or
understanding affecting the Company or its assets or business as a condition for
obtaining any such consents or approvals except with the prior written consent
of Parent.

     7.6. CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME. (a) Except as
expressly contemplated by this Agreement, the Company shall carry on its
business in, and not enter into any material transaction other than in
accordance with, the ordinary course consistent with past practice and, to the
extent consistent therewith, use its reasonable best efforts to preserve intact
its current business organization, keep available the services of its current
officers and preserve its relationships with customers, suppliers and others
having business dealings with it (except, in each case,


                                      -43-
   48


with the prior written consent of Parent). Without limiting the generality of
the foregoing, and except as expressly contemplated by this Agreement, the
Company shall not, without the prior written consent of Parent:

          (i) (A) declare, set aside or pay any dividends on, or make any other
     actual, constructive or deemed distributions in respect of, any of its
     capital stock, or otherwise make any payments to its Shareholders in their
     capacity as such, (B) split, combine or reclassify any of its capital stock
     or issue, sell or authorize the issuance of any other securities in respect
     of, in lieu of or in substitution for shares of its capital stock (other
     than any issuances of its securities upon the exercise of any outstanding
     options to purchase such securities or upon the conversion of any
     outstanding convertible securities that are convertible into such
     securities) or (C) purchase, redeem or otherwise acquire any shares of
     capital stock of the Company or any other securities thereof;

          (ii) except as set forth in clause (i) above, issue, deliver, sell,
     pledge, dispose of or otherwise encumber any shares of its capital stock or
     other securities (including, without limitation, any rights, warrants or
     options to acquire any shares of its capital stock or other securities);

          (iii) amend its Articles of Incorporation or Bylaws;

          (iv) acquire or agree to acquire by merging or consolidating with, or
     by purchasing a substantial portion of the assets of or equity in, or by
     any other manner, any business or any corporation, partnership, association
     or other business organization or division thereof;

          (v) incur or assume any indebtedness for borrowed money, enter into
     (as lessee) any capitalized lease obligation, guarantee any such
     indebtedness or obligation, issue or sell any debt securities, guarantee
     any debt securities of others or make any loans, advances or capital
     contributions to, or investments in, any other Person, except the
     incurrence and/or guarantee of indebtedness to fund working capital;

          (vi) make or incur any new capital expenditure or expenditures which,
     individually, is in excess of $50,000 or, in the aggregate, are in excess
     of $200,000;

          (vii) pay, discharge or satisfy any claims, liabilities or obligations
     (absolute, accrued, asserted or unasserted, contingent or otherwise), other
     than the payment, discharge or satisfaction thereof in the ordinary course
     of business consistent with past practice;

          (viii) alter through merger, liquidation, reorganization,
     restructuring or in any other fashion its corporate structure;


                                      -44-
   49


          (ix) enter into or adopt, or amend, any bonus, incentive, deferred
     compensation, insurance, medical, hospital, disability or severance plan,
     agreement or arrangement or enter into or amend any employee benefit plan
     or employment, consulting or management agreement, other than any such
     amendment to an employee benefit plan that is made to maintain the
     qualified status of such plan or its continued compliance with applicable
     law;

          (x) make any change in accounting practices or policies applied in the
     preparation of the financial statements referred to in SECTION 5.4, except
     as required by generally accepted accounting principles;

          (xi) modify any of the agreements, understandings, obligations,
     commitments, indebtedness or other obligations set forth in any of the
     Schedules to this Agreement, enter into any agreement, understanding,
     obligation or commitment, or incur any indebtedness or obligation, of the
     type that would have been required to be listed on SCHEDULE 5.19 if in
     existence on the date hereof, or enter into any contract which requires any
     approval or consent by any other Person to the transactions contemplated by
     this Agreement;

          (xii) pay or commit to pay any bonus to any officer or employee of the
     Company or make any other material change in the compensation of its
     employees;

          (xiii) make any change in its business or operations or make any
     expenditure which shall exceed the amount, as set forth in SCHEDULE 5.25,
     budgeted therefor;

          (xiv) make any capital expenditure or enter into any contract or
     commitment therefor, other than capital expenditures or commitments for
     capital expenditures referred to in the applicable budget contained in
     SCHEDULE 5.25;

          (xv) enter into any contract for the purchase of real property or for
     the sale of any Owned Real Property or exercise any option to purchase real
     property listed in SCHEDULE 5.10 or any option to extend a lease listed in
     SCHEDULE 5.11;

          (xvi) sell, lease (as lessor), transfer or otherwise dispose of, or
     mortgage or pledge, or impose or suffer to be imposed any Encumbrance on,
     any of the Company's assets, other than inventory and minor amounts of
     personal property sold or otherwise disposed of for fair value in the
     ordinary course of the Company's business consistent with past practice and
     other than Permitted Encumbrances;


                                      -45-
   50


          (xvii) cancel any debts owed to or claims held by the Company
     (including the settlement of any claims or litigation) other than in the
     ordinary course of the Company's business consistent with past practice;

          (xviii) accelerate or delay collection of any notes or accounts
     receivable in advance of or beyond their regular due dates or the dates
     when the same would have been collected in the ordinary course of its
     business consistent with past practice;

          (xix) delay or accelerate payment of any account payable or other
     liability beyond or in advance of its due date or the date when such
     liability would have been paid in the ordinary course of its business
     consistent with past practice;

          (xx) allow the levels of raw materials, supplies, work-in-process or
     other materials included in its inventory to vary in any material respect
     from the levels customarily maintained in its business;

          (xxi) enter into any transaction with Affiliates, other than on an
     arms' length basis;

          (xxii) prepare or file any Tax Return inconsistent with past practice
     or, on any such Tax Return, take any position, make any election, or adopt
     any method that is inconsistent with positions taken, elections made or
     methods used in preparing or filing similar Tax Returns in prior periods
     (including, without limitation, positions, elections or methods which would
     have the effect of deferring income to periods after the Closing Date or
     accelerating deductions to periods prior to the Closing Date);

          (xxiii) take any material action in respect of the intellectual
     property rights of the Company, including in respect of patents or patent
     applications, except in the ordinary course of business; or

          (xxiv) enter into any other transaction affecting the business of the
     Company, other than in the ordinary course of business consistent with past
     practice or as expressly contemplated by this Agreement.

     7.7. NOTIFICATION BY THE COMPANY OF CERTAIN MATTERS. During the period
prior to the Effective Time, the Company shall promptly advise Parent in writing
of (i) any change of event having a Material Adverse Effect on the Company, (ii)
any notice or other communication from any third Person alleging that the
consent of such third Person is or may be required in connection with the
transactions contemplated by this Agreement, and (iii) any material default
under any Company Agreement or event which, with notice or lapse of time or
both, would become such a default on or prior to the Effective Time and of which
the Company has knowledge.


                                      -46-
   51


     7.8. MUTUAL COOPERATION; REASONABLE BEST EFFORTS. The parties hereto shall
cooperate with each other, and shall use their respective reasonable best
efforts to cause as promptly as possible the fulfillment of the conditions to
each other party's obligations hereunder, including without limitation SECTIONS
9.3 and 10.2, and to obtain as promptly as possible all consents,
authorizations, orders or approvals from each and every third party, whether
private or governmental, required in connection with the transactions
contemplated by this Agreement; PROVIDED, HOWEVER, that the foregoing shall not
require Parent or the Company to make any divestiture or consent to any
divestiture in order to obtain any consent, authorization or fulfill any
condition or approval.

     7.9. COMPANY STOCK OPTIONS. (a) Prior to the Effective Time, the Company
shall terminate the 1995 Stock Option Plan and the 1999 Stock Option Plan and
any other stock-based incentive plan or arrangement providing for compensation
or consideration wholly or partially in the form of shares of Company Common
Stock or any other capital stock of the Company (collectively, the "STOCK OPTION
PLANS"), and shall grant no additional options, awards or rights ("COMPANY STOCK
OPTIONS") under such Stock Option Plans on or after the date of this Agreement,
except such options, awards or rights that the Company has, prior to the date of
this Agreement agreed to grant or proposed to grant (subject to approval by the
Company's Board of Directors) in connection with the commencement of an
individual's employment with the Company or in connection with an employee's
promotion to a new position, all of which are set forth on SCHEDULE 7.9.
SCHEDULE 7.9 identifies each Company Stock Option as of the date of this
Agreement, the Stock Option Plan pursuant to which such Company Stock Option was
granted, the holder of such Company Stock Option, the number of shares subject
to such Company Stock Option, the current exercise price of such Company Stock
Option and whether such Company Stock Option is an incentive stock option under
Section 422 of the Code.

     (b)  The Company shall take all actions necessary or appropriate to cause
all Company Stock Options that are, or as a result of the transactions
contemplated by this Agreement become, outstanding, vested and exercisable
immediately prior to the Effective Time to be exercised, effective immediately
prior to the Effective Time and contingent on the Closing of the Merger, in
accordance with their terms and the individual agreements and plans governing
such Company Stock Options. The holder of any Company Stock Option (each an
"OPTION HOLDER") that is partially or fully vested and is not exercised as of
the Effective Time will be entitled to receive, in consideration thereof, for
each share of Company Common Stock subject to the vested portion of the Company
Stock Option, an amount in cash equal to the excess, if any, of the Merger
Consideration over the exercise price per share of Company Common Stock subject
thereto. The amounts payable pursuant to this SECTION 7.9(b) shall be paid as
soon as reasonably practicable following the Closing Date without interest
thereon and shall be subject to and made net of all applicable withholding
taxes. Upon receipt of such payment in respect of the vested portion of any
Company Stock Option, such vested portion of the Company Stock Option shall be
cancelled. The receipt by the Option Holder of the consideration contemplated by
this SECTION 7.9(b) shall be deemed a release of any and all rights the Option
Holder thereof had or may have had in respect


                                      -47-
   52


of the applicable Company Stock Option with respect to the vested portion of
such Company Stock Option.

     (c)  At the Effective Time, the unvested portion of each Company Stock
Option that is outstanding immediately subsequent to the Effective Time shall
become and represent an option to purchase the number of shares of common stock
("PARENT COMMON STOCK") of Parent under Parent's stock option plan (a
"SUBSTITUTE OPTION") determined by dividing (i) the number of shares of Company
Common Stock subject to the unvested portion of such Company Stock Option
immediately prior to the Effective Time by (ii) the Exchange Ratio (as defined
in SECTION 7.9(e), at an exercise price per share of Parent Common Stock
(rounded up to the nearest cent), equal to the exercise price per share of
Company Common Stock immediately prior to the Effective Time multiplied by the
Exchange Ratio. Any fractional shares of Parent Common Stock resulting from the
formula described in the foregoing sentence shall be rounded down to the nearest
whole number. It is the intention of the parties that the above formula shall be
applied in a manner consistent with Section 424(a) of the Code. Parent will
grant incentive stock options to acquire Parent Common Stock as Substitute
Options for incentive stock options to acquire Company Common Stock and grant
nonqualified stock options to acquire Parent Common Stock as Substitute Options
for nonqualified stock options to acquire Company Common Stock. After the
Effective Time, each Substitute Option shall be subject to the terms and
conditions of the Parent's stock option plan and standard terms and conditions
of options granted thereunder, except that each Substitute Option shall provide
that: (i) upon the first anniversary of the Closing Date such option shall be
vested and exercisable for one-half (1/2) of the shares of Parent Common Stock
subject to such Substitute Option as of the Closing Date; (ii) upon the second
anniversary of the Closing Date such option shall be vested and exercisable for
three-fourths (3/4) of the shares of Parent Common Stock subject to such
Substitute Option as of the Closing Date; and (iii) upon the third anniversary
of the Closing Date such option shall be fully vested and exercisable for all of
the shares of Parent Common Stock subject to such Substitute Option as of the
Closing Date. Notwithstanding the foregoing, Parent may take any action or make
any amendment to the Substitute Options as Parent deems necessary or advisable
so that the Substitute Options comply with the requirements of Section 424(a) of
the Code.

     (d)  The Company (i) shall take all action necessary to implement the
provisions of this SECTION 7.9, including amending the agreements representing
the outstanding stock option awards under the 1999 Stock Option Plan pursuant to
resolution by the Company's Board of Directors in form and substance
satisfactory to Parent and obtaining the written consent of each Option Holder
of a 1999 Company Stock Option to such amendments in form and substance
satisfactory to Parent, and (ii) shall provide Parent with duly executed copies
of such amendments and consents prior to the Effective Time. Prior to the
Effective Time, the Company shall use its best efforts to obtain any other
necessary consents or releases from the Option Holders and to take any such
other lawful action as may be necessary or appropriate to give effect to this
SECTION 7.9.


                                      -48-
   53

     (e)  For purposes of this SECTION 7.9, the "Exchange Ratio" shall be
determined by dividing the Per Share Parent Price by the Per Share Company
Price. The "Per Share Parent Price" shall be the average per share closing price
for Parent Common Stock as listed on the New York Stock Exchange for the 10
trading days immediately prior to the Closing Date and the "Per Share Company
Price" shall be the Fully Diluted Per Share Price.

     7.10. STATE TAKEOVER LAWS. If any "fair price," "business combination" or
"control share acquisition" statute or other similar statute or regulation shall
become applicable to the transactions contemplated hereby, Parent, Mergerco and
the Company and the respective Boards of Directors of Mergerco and the Company
shall use their best efforts to grant such approvals and take such actions as
are necessary so that the transactions contemplated hereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
minimize the effects of any such statute or regulation on the transactions
contemplated hereby.

     7.11. TERMINATION OF COMPANY 401(k) PLAN. The Company shall terminate the
Company's 401(k) Plan prior to the Effective Date and shall deliver to Parent a
written resolution, in form and substance acceptable to Parent, effecting such
termination on or before the Effective Date.

                                  ARTICLE VIII

                              ADDITIONAL AGREEMENTS

     8.1. EMPLOYEE BENEFITS. In the event that employees of the Company become
eligible to participate in any of Parent's employee benefit plans or programs in
accordance with the terms and conditions of the applicable Parent benefit plans
and programs and applicable law, such employees shall receive credit for their
length of service with the Company for purposes of eligibility and vesting under
Parent's employee benefit plans and programs, including, without limitation,
employee pension and welfare benefit plans

                                   ARTICLE IX

           CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGERCO

     The obligations of Parent and Mergerco under this Agreement shall, at the
option of Parent and Mergerco, be subject to the satisfaction, on or prior to
the Effective Time, of the following conditions:

     9.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES.

     (a) There shall have been no material breach by the Company or the
Shareholder Representative in the performance of any of their respective
covenants and agreements herein; none of the representations or warranties of
the Company or


                                      -49-
   54


the Shareholder Representative contained or referred to herein shall be untrue
or incorrect in any respect at the Effective Time and such representations and
warranties shall be true and correct as though made at the Effective Time,
except for changes therein specifically permitted by this Agreement or resulting
from any transaction expressly consented to in writing by Parent and Mergerco or
any transaction permitted by SECTION 7.6; and there shall have been delivered to
Parent and Mergerco a certificate or certificates to such effect, dated the
Effective Date and signed on behalf of the Company by the President or any Vice
President of the Company and by the Shareholder Representative.

     (b)  There shall have been no material breach by any Significant
Shareholder in the performance of any of its covenants and agreements contained
in the applicable Voting Agreement; none of the representations or warranties of
such Significant Shareholder contained or referred to in the applicable Voting
Agreement shall be untrue or incorrect in any respect at the Effective Time and
such representations and warranties shall be true and correct as though made at
the Effective Time; and there shall have been delivered to Parent and Mergerco a
certificate or certificates to such effect, dated the Effective Date and signed
on by such Significant Shareholder.

     9.2. NO CHANGES OR DESTRUCTION OF PROPERTY. Between the date hereof and the
Effective Time, there shall have been (a) no change or event having a Material
Adverse Effect on the Company; (b) no material adverse federal or state
legislative or regulatory change affecting the Company's business or its
products or services; and (c) no material damage to the Company's assets by
fire, flood, casualty, act of God or the public enemy or other cause, regardless
of insurance coverage for such damage; and there shall have been delivered to
Parent and Mergerco a certificate or certificates to such effect, dated the
Effective Date and signed on behalf of the Company by the President or any Vice
President of the Company and on behalf of the Shareholder Representative by the
President or any Vice President of the Shareholder Representative.

     9.3. NO RESTRAINT OR INJUNCTION. No temporary restraining order,
preliminary or permanent injunction or other order issued by a court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect.

     9.4. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all
approvals and actions of or by all Governmental Bodies which are necessary to
consummate the transactions contemplated hereby, which are either specified in
SCHEDULE 5.3 or otherwise required to be obtained prior to the Closing by
applicable Requirements of Laws or which are necessary to prevent a Material
Adverse Effect on the Company.

     9.5. NECESSARY CONSENTS. The Company or the Shareholder Representative
shall have received consents, in form and substance reasonably satisfactory to
Mergerco and Parent, to the transactions contemplated hereby from the other
parties to all contracts, leases, agreements and permits to which the Company is
a party or by


                                      -50-
   55


which the Company or any of its assets is affected and which are specified in
SCHEDULE 9.5 or are otherwise necessary to prevent a Material Adverse Effect on
the Company.

     9.6. SHAREHOLDER APPROVAL AND CONVERSION OF PREFERRED STOCK. (a) This
Agreement shall have been duly approved by the requisite votes of the
Shareholders in accordance with the WBCA and the Articles of Incorporation and
Bylaws of the Company, including the approval by the Preferred Stock Holders.

(b) The Preferred Stock Holders shall have taken such action as is necessary
under the Articles of Incorporation and Bylaws of the Company and the WBCA to
effect the automatic conversion, immediately prior to the consummation of the
Merger, of all shares of Preferred Stock into shares of Company Common Stock in
accordance with the terms and subject to the conditions of the Articles of
Incorporation of the Company.

     9.7. DISSENTERS' RIGHTS. Holders of not more than 5% of the outstanding
shares of Company capital stock shall have properly exercised and not revoked
their rights to dissent to the Merger under Chapter 23B.13 of the WBCA.

     9.8. EFFECTIVE AGREEMENTS. Each of the Foster Employment Agreement, the
Employment Agreements, the Non-Competition Agreements, the Foster
Non-Competition Agreement, the Escrow Agreement and the Voting Agreements shall
be in full force and effect.

     9.9. OTHER CONVERTIBLE SECURITIES. In addition to the Preferred Stock, any
other outstanding securities, options, warrants or other rights to purchase that
are convertible into or exercisable for Company Common Stock or any other
capital stock of the Company shall have been fully converted or exercised for
Company Common Stock or cancelled, and thereafter no holder of any such
instrument shall any rights to acquire any equity security of the Company, the
Surviving Corporation or Parent.

     9.10. AGREEMENT WITH WIDEBAND. The Company shall have entered into a
License Agreement with Wideband Semiconductor, Inc. on terms and conditions
reasonably satisfactory to Parent, and such agreement shall be in full force and
effect.

     9.11. OPINION OF INTELLECTUAL PROPERTY COUNSEL. The Company shall have
received an opinion from Fulbright & Jaworski, its intellectual property
counsel, substantially in the form of the opinion issued to the Company by
Fulbright & Joworski dated June 16, 2000.


                                      -51-
   56


                                   ARTICLE X

                      CONDITIONS PRECEDENT TO OBLIGATIONS
                                 OF THE COMPANY

     The obligations of the Company under this Agreement shall, at the option of
the Company, be subject to the satisfaction, on or prior to the Effective Time,
of the following conditions:

     10.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES. There
shall have been no material breach by Parent or Mergerco in the performance of
any of their respective covenants and agreements herein; none of the
representations or warranties of Parent or Mergerco contained or referred to
herein shall be untrue or incorrect in any respect at the Effective Time and
such representations and warranties shall be true and correct at the Effective
Time as though made at the Effective Time, except for changes therein
specifically permitted by this Agreement or resulting from any transaction
expressly consented to in writing by the Company and the Shareholder
Representative; and there shall have been delivered to the Company and the
Shareholder Representative a certificate or certificates to such effect, dated
the Effective Date and signed on behalf of Parent by the President or any Vice
President of Parent and on behalf of Mergerco by the President or any Vice
President of Mergerco.

     10.2. NO RESTRAINT OR INJUNCTION. No temporary restraining order,
preliminary or permanent injunction or other order issued by a court of
competent jurisdiction of other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect.

     10.3. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have received all
approvals and actions of or by all Governmental Bodies necessary to consummate
the transactions contemplated hereby, which are required to be obtained prior to
the Closing by applicable Requirements of Laws.

     10.4. SHAREHOLDER APPROVAL. This Agreement shall have been duly approved by
the requisite vote of the Shareholders in accordance with the WBCA and the
Articles of Incorporation and Bylaws of the Company; PROVIDED, HOWEVER, that
this condition shall not be effective if its failure is primarily the result of
the Company's failure to perform its obligations under SECTION 7.1.

     10.5. EFFECTIVE AGREEMENTS. The Escrow Agreement shall be in full force and
effect.

                                   ARTICLE XI

                                   TERMINATION

     11.1. TERMINATION RIGHTS. Anything contained in this Agreement to the
contrary notwithstanding, this Agreement may be terminated at any time prior to
the Effective Time:


                                      -52-
   57


     (a)  by the mutual consent of all of the parties hereto;

     (b)  by any party if the Effective Time shall not have occurred on or
before September 30, 2000 (or such later date as may be mutually agreed to by
all of the parties hereto);

     (c)  by Parent in the event of any material breach by the Shareholder
Representative or the Company of any of their respective agreements,
representations or warranties contained herein and the failure of the
Shareholder Representative or the Company to cure, within seven days after
receipt of notice from Parent requesting that such breach be cured; or

     (d)  by the Company in the event of any material breach by Parent or
Mergerco of any of their respective agreements, representations or warranties
contained herein and the failure of Parent to cure such breach, or cause
Mergerco to cure such breach, within seven days after receipt of notice from the
Company requesting that such breach be cured.

     11.2. NOTICE OF TERMINATION. Any party desiring to terminate this Agreement
pursuant to SECTION 11.1 shall give notice of such termination to each of the
other parties to this Agreement.

     11.3. EFFECT OF TERMINATION. In the event that this Agreement shall be
terminated pursuant to this ARTICLE XI, all further obligations of the parties
under this Agreement (other than SECTIONS 12.2 and 12.9) shall be terminated
without further liability of any party to the others; PROVIDED, HOWEVER, that
nothing herein shall relieve any party from liability for its willful breach of
this Agreement.

                                  ARTICLE XII

                               GENERAL PROVISIONS

     12.1. SURVIVAL OF OBLIGATIONS. All representations, warranties, covenants
and obligations contained in this Agreement shall survive the consummation of
the transactions contemplated by this Agreement.

     12.2. CONFIDENTIAL NATURE OF INFORMATION. Each party agrees that it will
treat in confidence all documents, materials and other information which it
shall have obtained regarding the other parties during the course of the
negotiations leading to the consummation of the transactions contemplated hereby
(whether obtained before or after the date of this Agreement), the investigation
provided for herein and the preparation of this Agreement and other related
documents, and, in the event the transactions contemplated hereby shall not be
consummated, each party will return to the other parties all copies of nonpublic
documents and materials which have been furnished in connection therewith. Such
documents, materials and information shall not be communicated to any third
Person (other than, in the case of Parent and Mergerco, to their counsel,
accountants, financial advisors or lenders, and, in the case of the Company and
the Shareholder Representative, to their counsel, accountants or


                                      -53-
   58


financial advisors). No other party shall use any confidential information in
any manner whatsoever except solely for the purpose of evaluating the proposed
Merger; PROVIDED, HOWEVER, that after the Effective Time, Parent and the
Surviving Corporation may use or disclose any confidential information included
in the assets of the Company as of the Effective Time or otherwise reasonably
related to the assets or business of the Company. The obligation of each party
to treat such documents, materials and other information in confidence shall not
apply to any information which (i) is or becomes available to such party from a
source other than such party, (ii) is or becomes available to the public other
than as a result of disclosure by such party or its agents, (iii) is required to
be disclosed under applicable law or judicial process, but only to the extent it
must be disclosed, or (iv) such party reasonably deems necessary to disclose to
obtain any of the consents or approvals contemplated hereby.

     12.3. NO PUBLIC ANNOUNCEMENT. No party hereto shall, without the approval
of all of the other parties, make any press release or other public announcement
concerning the transactions contemplated by this Agreement, except as and to the
extent that any such party shall be so obligated by law or the rules of any
stock exchange, in which case such party shall so advise the other parties and
all parties shall use their reasonable best efforts to cause a mutually
agreeable release or announcement to be issued; PROVIDED that the foregoing
shall not preclude communications or disclosures necessary to implement the
provisions of this Agreement or to comply with accounting and Securities and
Exchange Commission disclosure obligations.

     12.4. NOTICES. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed given or delivered when
delivered personally or four days after being mailed by registered or certified
mail, return receipt requested, or one day after being sent by private overnight
courier addressed as follows:

     (a)  If to the Company (after the Effective Time), Parent or Mergerco, to:


                           Harris Corporation
                           1025 West NASA Blvd.
                           Melbourne, FL  32919
                           Attention:  Richard Ballantyne

                           with a copy to:

                           Harris Corporation


                                      -54-
   59


                           330 Twin Dolphin Drive
                           Redwood Shores, CA  94065
                           Attention:  Samuel Wyman

                           and:

                           Sidley & Austin
                           Bank One Plaza
                           10 South Dearborn Street
                           Chicago, IL  60603
                           Attention:  David Zampa

     (b)  If to the Company (prior to the Effective Time) or the Shareholder
Representative, to:

                           Wavtrace, Inc.
                           1575 132nd  Avenue NE
                           Bellevue, WA  98005
                           Attention:  President and
                                         Chief Financial Officer

                           with a copy to:

                           Venture Law Group
                           4750 Carillon Point
                           Kirkland, WA  98033
                           Attention:  Craig Sherman

or to such other address as such party may indicate by a notice delivered to the
other parties hereto.

     12.5. SUCCESSORS AND ASSIGNS; SHAREHOLDER REPRESENTATIVE.

     (a)  The rights of each party under this Agreement shall not be assignable
by such party prior to the Effective Time without the written consent of each of
the other parties, except that the rights of Parent hereunder may be assigned
prior to the Effective time, without the consent of any other party hereto, to
any corporation all of the outstanding capital stock of which is owned or
controlled by Parent or to any general or limited partnership in which Parent or
any such corporation is a general partner; PROVIDED that (i) the assignee shall
assume in writing all of Parent's obligations hereunder, (ii) Parent shall not
be released from any of its obligations hereunder by reason of such assignment
and (iii) the obligations of the Company and the Shareholder Representative
under this Agreement shall be subject to the delivery by such assignee, on or
prior to the Effective Time, of a certificate signed on its behalf containing
representations and warranties similar to those made by Parent in ARTICLE VI.
Following


                                      -55-
   60


the Effective Time, any party may assign any of its rights hereunder, but no
such assignment shall relieve it of its obligations hereunder.

     (b)  This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and permitted assigns. The successors and
permitted assigns hereunder shall include without limitation, in the case of
Parent, any permitted assignee as well as the successors in interest to such
permitted assignee (whether by merger, liquidation (including successive mergers
or liquidations) or otherwise). Nothing in this Agreement, expressed or implied,
is intended or shall be construed to confer upon any Person other than the
parties and successors and assigns permitted by this SECTION 12.5 any right,
remedy or claim under or by reason of this Agreement.

     (c)  Prior to the Effective Date, the Shareholder Representative may resign
at any time by giving 30 days' notice to Parent and the Company; PROVIDED,
HOWEVER, that such resignation shall not be effective unless and until a
successor Shareholder Representative has been appointed and accepts such
position and the terms hereof and of the Escrow Agreement. In such event, Parent
and the Company shall appoint a successor Shareholder Representative or, if
Parent and the Company are unable to agree upon a successor Shareholder
Representative within 30 days after such notice, the Shareholder Representative
shall be entitled to appoint its own successor; PROVIDED, HOWEVER, that such
successor shall be a Person that satisfies the requirements for a successor
Escrow Agent under the Escrow Agreement. Prior to the Effective Date, if the
Shareholder Representative dies or is otherwise unable to perform its
obligations under this Agreement and would be unable to perform its obligations
under the Escrow Agreement after the Effective Date or, in the case of a
successor Shareholder Representative that is not a natural Person, becomes
bankrupt, insolvent or ceases to exist, then Parent and the Company shall
appoint a successor Shareholder Representative or, if Parent and the Company are
unable to agree upon a successor Shareholder Representative within 30 days after
such event, the successor Shareholder Representative shall be selected by lot
from two Persons that satisfy the requirements for a successor Escrow Agent
under the Escrow Agreement, one selected by Parent and one selected by the
Shareholder Representative. After the Effective Date, the Shareholder
Representative may resign at any time by giving 30 days' notice to Parent and
the Company; PROVIDED, HOWEVER, that such resignation shall not be effective
unless and until a successor Shareholder Representative has been appointed and
accepts such position and the terms hereof and of the Escrow Agreement. In such
event, Parent and the Shareholder Representative shall appoint a successor
Shareholder Representative or, if Parent and the Shareholder Representative are
unable to agree upon a successor Shareholder Representative within 30 days after
such notice, the successor Shareholder Representative shall be selected by lot
from two Persons that satisfy the requirements for a successor Escrow Agent
under the Escrow Agreement, one selected by Parent and one selected by the
Shareholder Representative. After the Effective Date, if the Shareholder
Representative dies or is otherwise unable to perform its obligations under this
Agreement or the Escrow Agreement or, in the case of a successor Shareholder
Representative that is not a natural Person, becomes bankrupt,


                                      -56-
   61


insolvent or ceases to exist, then the successor Shareholder Representative
shall be selected by lot from three Persons that satisfy the requirements for a
successor Escrow Agent under the Escrow Agreement.

     12.6. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Exhibits and
Schedules referred to herein, the Voting Agreements and the documents delivered
pursuant hereto or thereto contain the entire understanding of the parties
hereto and thereto with regard to the subject matter contained herein or
therein, and supersede all prior agreements, understandings or letters of intent
between or among any of the parties hereto; PROVIDED, that notwithstanding
anything herein to the contrary, the parties acknowledge and agree that Section
14 of the Letter Agreement shall remain in full force and effect and shall
remain binding upon the parties thereto. This Agreement shall not be amended,
modified or supplemented except by a written instrument signed by an authorized
representative of each of the parties hereto.

     12.7. INTERPRETATION. Titles to articles and headings to sections herein
are inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement. The Schedules
and Exhibits referred to herein shall be construed with and as an integral part
of this Agreement to the same extent as if they were set forth verbatim herein.
Except as expressly stated to the contrary herein, all dollar amounts in this
Agreement refer to lawful money of the United States of America.

     12.8. WAIVERS. Any term or provision of this Agreement may be waived, or
the time for its performance may be extended, by the party or parties entitled
to the benefit thereof. Any such waiver shall be validly and sufficiently
authorized for the purposes of this Agreement if, as to any party, it is
authorized in writing by an authorized representative of such party. The failure
of any party hereto to enforce at any time any provision of this Agreement shall
not be construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of any party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.

     12.9. FEES AND EXPENSES. Except as otherwise provided in this SECTION 12.9,
each of the parties hereto shall bear its own costs and expenses (including,
without limitation, fees and disbursements of its counsel, accountants and other
financial, legal, accounting or other advisors), incurred by it or its
Affiliates in connection with the preparation, negotiation, execution, delivery
and performance of this Agreement and each of the other documents and
instruments executed in connection with or contemplated by this Agreement and
the consummation of the transactions contemplated hereby and thereby
(collectively, the "ACQUISITION EXPENSES"); PROVIDED, HOWEVER, that, except for
up to $200,000 of Acquisition Expenses of the Shareholder Representative and the
Company relating to the transactions contemplated by this Agreement, which
$200,000 of Acquisition Expenses are attributable to and shall be borne by the
Company, the Acquisition Expenses of the Shareholder Representative and the
Company shall be paid out of the Escrow Amount (as defined in the Escrow
Agreement) pursuant to the Escrow Agreement.


                                      -57-
   62


     12.10. PARTIAL INVALIDITY. Wherever possible, each provision hereof shall
be interpreted in such manner as to be effective and valid under applicable law,
but in case any one or more of the provisions contained herein shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
provision shall be ineffective to the extent, but only to the extent, of such
invalidity, illegality or unenforceability without invalidating the remainder of
such invalid, illegal or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.

     12.11. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be considered an original instrument, but
all of which shall be considered one and the same agreement, and shall become
binding when one or more counterparts have been signed by each of the parties
hereto and delivered to each of the other parties.

     12.12. FURTHER ASSURANCES. From time to time after the Effective Time, the
officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of Mergerco, the Company or
otherwise, such deeds and other instruments and to take or cause to be taken
such further or other action as shall be necessary or desirable in order to vest
or perfect in or to confirm, of record or otherwise, in the Surviving
Corporation title to, and possession of, all of the property, rights,
privileges, powers, immunities and franchises of Mergerco and the Company and
otherwise carry out the purposes of this Agreement.

     12.13. GOVERNING LAW. Except to the extent that Washington law is
mandatorily applicable to the Merger and the rights and obligations of the
shareholders of the Company and Mergerco, this Agreement shall be governed by
and construed in accordance with the internal laws (as opposed to the conflicts
of law provisions) of the State of New York.


                                      -58-
   63


     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the day and year first above written.

                                       HARRIS CORPORATION


                                       By:   /s/ Phillip W. Farmer
                                          --------------------------------------
                                       Name: Phillip W. Farmer
                                       Title: Chairman of the Board, President
                                              and Chief Executive Officer



                                       WT ACQUISITION CORP.


                                       By:   /s/ Phillip W. Farmer
                                          --------------------------------------
                                       Name: Phillip W. Farmer
                                       Title: President


                                       WAVTRACE, INC.


                                       By:   /s/ Thomas T. van Overbeek
                                          --------------------------------------
                                       Name: Thomas T. van Overbeek
                                       Title: President and Chief Executive
                                                Officer


                                             /s/ Thomas T. van Overbeek
                                       -----------------------------------------
                                       THOMAS T. VAN OVERBEEK,
                                       AS THE SHAREHOLDER REPRESENTATIVE



                                      -59-
   64
                                                                     Exhibit 2.1

                     FIRST AMENDMENT TO AGREEMENT OF MERGER


     FIRST AMENDMENT TO AGREEMENT OF MERGER, dated as of August 22, 2000 (this
"First Amendment"), among HARRIS CORPORATION, a Delaware corporation ("Parent"),
WT ACQUISITION CORP., a Washington corporation and wholly owned subsidiary of
Parent ("Mergerco"), WAVTRACE, INC., a Washington corporation (the "Company"),
and THOMAS T. VAN OVERBEEK, a natural person (the "Shareholder Representative").

                              W I T N E S S E T H:

     WHEREAS, Parent, Mergerco, the Company and the Shareholder Representative
have entered into the Agreement of Merger, dated as of July 28, 2000 (the
"Merger Agreement"), providing for the merger of Mergerco and the Company upon
the terms and subject to the conditions contained therein; and

     WHEREAS, Parent, Mergerco, the Company and the Shareholder Representative
desire to amend the Merger Agreement in certain respects in accordance with
SECTION 12.6 thereof.

     NOW, THEREFORE, in consideration of the premises and of the agreements
herein contained, the parties hereto agree as follows:

     1. The definition of "Escrow Payment" in SECTION 1.1 of the Merger
Agreement is hereby amended and restated to read in its entirety as follows:

     "ESCROW PAYMENT" means any amount payable to the former shareholders of the
Company and the holders of Unexercised Vested Options pursuant to the Escrow
Agreement.

     2. The definition of "Per Share Closing Payment" in SECTION 1.1 of the
Merger Agreement is hereby amended and restated to read in its entirety as
follows:

     "PER SHARE CLOSING PAYMENT" means the Closing Consideration DIVIDED BY (i)
the number of shares of Company Common Stock (other than such shares held by
Parent) outstanding immediately prior to the Effective Time plus (ii) the number
of shares of Company Common Stock subject to Unexercised Vested Options.

     3. The definition of "Per Share Escrow Payment" in SECTION 1.1 of the
Merger Agreement is hereby amended and restated to read in its entirety as
follows:

     "PER SHARE ESCROW PAYMENT" means, in respect of any Escrow Payment, the
amount of such payment DIVIDED BY (i) the number of shares of Company Common
Stock (other than such shares held by Parent) outstanding immediately prior to
the Effective Time plus (ii) the number of shares of Company Common Stock
subject to Unexercised Vested Options.


   65

     4. The definition of "Purchase Price" in SECTION 1.1 of the Merger
Agreement is hereby amended and restated to read in its entirety as follows:

     "PURCHASE PRICE" means $ 175 million LESS (i) (x) the Fully Diluted Per
Share Price less the weighted average of the exercise prices of the unvested
options to acquire Company Common Stock multiplied by (y) the number of unvested
options to acquire Company Common Stock; (ii) the Fully Diluted Per Share Price
multiplied by 14,464,573 (the number of fully diluted shares of Company Common
Stock held by Parent); and (iii) the dollar amount that the Company shall owe to
Hambrecht & Quist LLC ("H & Q") upon consummation of the Merger pursuant to the
letter agreement between the Company and H & Q dated January 24, 2000 PLUS the
amount of cash, if any, received by the Company upon exercise of any of the
warrants held by parties other than Parent, all as determined immediately prior
to the Effective Time.

     5. The following definition of "Unexercised Vested Options" is hereby added
to SECTION 1.1 of the Merger Agreement:

     "UNEXERCISED VESTED OPTION" means a Company Stock Option that has vested
(or that portion of any Company Stock Option that has vested) but has not been
exercised by the Effective Time.

     6. SECTION 3.3(a) of the Merger Agreement is hereby amended and restated to
read in its entirety as follows:

     (a) EXCHANGE AGENT. On the Closing Date, Parent shall deposit with an
exchange agent to be determined by Parent prior to the Closing (the "EXCHANGE
AGENT"), for the benefit of the holders of shares of Company Common Stock, for
exchange in accordance with this ARTICLE III, through the Exchange Agent, cash
equal to the Closing Consideration less that portion of the Closing
Consideration payable to the holders of Unexercised Vested Options pursuant to
SECTION 7.9 (such cash, together with any earnings with respect thereto, and
such certificates being hereinafter referred to as the "EXCHANGE FUND").

     7. The following provision is hereby added as SECTION 3.3(j) of the Merger
Agreement:

     (j) UNEXERCISED VESTED OPTIONS. Unexercised Vested Options shall be treated
in accordance with the procedures set forth in SECTION 7.9.

     8. SECTION 7.9(b) of the Merger Agreement is hereby amended and restated to
read in its entirety as follows:

     (b) The Company shall take all actions necessary or appropriate to cause
all Company Stock Options that are, or as a result of the transactions
contemplated by this Agreement become, outstanding, vested and exercisable
immediately prior to the Effective Time to be exercised, effective immediately
prior to the Effective Time and contingent on the Closing of the Merger, in
accordance with their terms and the individual agreements and plans governing
such Company Stock


                                       2
   66


Options. The holder of any Unexercised Vested Option (each an "OPTION HOLDER")
will be entitled to receive, in consideration thereof, for each share of Company
Common Stock subject to such Unexercised Vested Option, an amount equal to the
Merger Consideration; PROVIDED, however that the Per Share Closing Payment
payable to each such Option Holder (the "VESTED OPTION CLOSING PAYMENT") shall
be reduced by the exercise price per share of such Company Common Stock subject
to the Unexercised Vested Option held thereby. The Vested Option Closing Payment
shall be paid as soon as reasonably practicable following the Closing Date
without interest thereon and shall be subject to and made net of all applicable
withholding taxes. Upon receipt of such payment in respect of the vested portion
of any Company Stock Option, such vested portion of the Company Stock Option
shall be cancelled. The receipt by the Option Holder of the consideration
contemplated by this SECTION 7.9(b) shall be deemed a release of any and all
rights the Option Holder thereof had or may have had in respect of the
applicable Company Stock Option with respect to the vested portion of such
Company Stock Option.

     9. EXHIBIT B to the Merger Agreement is hereby amended and restated to read
in its entirety as attached hereto as ANNEX A.

     10. Capitalized terms used but not defined herein shall have the meanings
set forth in the Merger Agreement.

     11. The Merger Agreement, as amended by this First Amendment, shall remain
in full force and effect in accordance with its terms. This First Amendment may
be executed in one or more counterparts.


                                       3
   67


     IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed as of the date first written above.


                                       HARRIS CORPORATION


                                       By:   /s/ Bryan R. Roub
                                          --------------------------------------
                                             Name:  Bryan R. Roub
                                             Title: Senior Vice President and
                                                      Chief Financial Officer



                                       WT ACQUISITION CORP.


                                       By:   /s/ Bryan R. Roub
                                          --------------------------------------
                                             Name:  Bryan R. Roub
                                             Title: Senior Vice President and
                                                      Chief Financial Officer


                                       WAVTRACE, INC.


                                       By:   /s/ Thomas T. van Overbeek
                                          --------------------------------------
                                             Name:  Thomas T. van Overbeek
                                             Title:  President and Chief
                                                       Executive Officer


                                             /s/ Thomas T. van Overbeek
                                       -----------------------------------------
                                       THOMAS T. VAN OVERBEEK,
                                       as the Shareholder Representative


                                       4

EX-2.2

   1
                                                                     EXHIBIT 2.2










                      INDEMNIFICATION AND ESCROW AGREEMENT

                           DATED AS OF AUGUST 31, 2000

                                      AMONG

                               HARRIS CORPORATION,

                                 WAVTRACE, INC.,

                             THOMAS T. VAN OVERBEEK

                                       AND

                                 CITIBANK, N.A.


   2

                                TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----

Section 1.        Definitions.................................................1

Section 2.        Deposit and Use of Escrow Amount............................2

Section 3.        Disposition of Escrow Amount................................2

Section 4.        Delivery of Escrow Amount Upon Termination..................5

Section 5.        Permitted Investments; Interest.............................6

Section 6.        Liability and Compensation of Escrow Agent..................7

Section 7.        Shareholder Representative.................................10

Section 8.        Taxes......................................................11

Section 9.        Representations and Warranties.............................11

Section 10.       Indemnification Provisions and Payment of Net Worth
                  Adjustment Amount..........................................12

Section 11.       Benefit; Successor and Assigns.............................14

Section 12.       Termination................................................14

Section 13.       Notices....................................................14

Section 14.       Governing Law..............................................15

Section 15.       Dispute Resolution.........................................15

Section 16.       Counterparts...............................................16

Section 17.       Headings...................................................16

Section 18.       Partial Invalidity.........................................16

Section 19.       Entire Agreement; Modification and Waiver..................17



                                       i
   3




                      INDEMNIFICATION AND ESCROW AGREEMENT

           This INDEMNIFICATION and ESCROW AGREEMENT (this "ESCROW AGREEMENT"),
is dated as of August 31, 2000, among Harris Corporation, a Delaware corporation
("PARENT"), Wavtrace, Inc., a Washington corporation (the "COMPANY"), Thomas T.
van Overbeek (the "SHAREHOLDER REPRESENTATIVE") and Citibank, N.A., as
indemnification and escrow agent (the "ESCROW AGENT").

                              W I T N E S S E T H:
                              - - - - - - - - - -

           WHEREAS, the Company, WT Acquisition Corp., a Washington corporation
("MERGERCO"), the Shareholder Representative and Parent are parties to the
Agreement of Merger, dated as of July 28, 2000 (the "MERGER AGREEMENT"),
pursuant to which Mergerco shall be merged with and into the Company (the
"MERGER"), with the Company surviving as a wholly owned subsidiary of Parent (as
such, the "SURVIVING CORPORATION");

           WHEREAS, as a condition to their entering into the Merger Agreement,
Parent and Mergerco are being indemnified, held harmless and reimbursed pursuant
to the conditions set forth herein;

           WHEREAS, to ensure that funds will be available to indemnify, hold
harmless and reimburse Parent Group Members (as defined herein), on the Closing
Date, the Parent shall deposit an amount in U.S. dollars equal to the Escrow
Amount (as defined in the Merger Agreement) with the Escrow Agent in an escrow
account established pursuant to this Escrow Agreement to be held and
subsequently disbursed in accordance with the express terms of this Escrow
Agreement;

           WHEREAS, the Merger Agreement provides for the Shareholder
Representative to act in accordance herewith in connection with this Escrow
Agreement; and

           WHEREAS, the Escrow Agent has been appointed by Parent and the
Shareholder Representative and has agreed to hold the Escrow Amount pursuant to
the express terms of this Escrow Agreement;

           NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties hereto agree as follows:

Section 1. DEFINITIONS.

           Capitalized terms used but not defined herein shall have the meanings
set forth in the Merger Agreement. As used herein:

           "EXPENSES" shall mean any and all expenses incurred in connection
with investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder (including, without
limitation, court filing fees, court costs, arbitration fees or costs, witness
fees and reasonable fees and


                                      -1-
   4


disbursements of legal counsel, investigators, expert witnesses, consultants,
accountants and other professionals).

           "LOSSES" shall mean any and all losses, costs, obligations,
liabilities, settlement payments, payments with respect to Taxes, awards,
judgments, fines, penalties, damages, expenses, deficiencies or other charges.

           "PARENT GROUP MEMBER" shall mean the Surviving Corporation, Parent,
or any of their respective Affiliates and their respective successors and
assigns.

           "PERMITTED INVESTMENT" shall mean any or any combination of the
following: (i) readily marketable obligations maturing within six (6) months
after the date of acquisition thereof issued by the United States of America or
any agency or instrumentality thereof; (ii) readily marketable obligations
maturing within six (6) months after the date of acquisition thereof issued by
any state or municipality within the United States of America, or any political
subdivision, agency or instrumentality thereof, rated "A" or better by either
Standard & Poor's Corporation or Moody's Investors Service Inc.; (iii) readily
marketable commercial paper maturing within one hundred eighty (180) days after
the date of issuance thereof which has the highest credit rating of either
Standard & Poor's Corporation or Moody's Investors Service, Inc.; (iv) six (6)
month certificates of deposit issued by any bank incorporated and doing business
pursuant to the laws of the United States of America or any state thereof having
combined capital and surplus of at least $500,000,000 or (v) money market funds
(including, but not limited to, Goldman, Sachs FS Prime Obligations Fund Service
Class (464)).

           "SHAREHOLDERS" shall mean the holders of shares of Company Common
Stock and the holders of Unexercised Vested Options who have the right to
receive any Per Share Escrow Payments pursuant to the Merger Agreement.

Section 2. DEPOSIT AND USE OF ESCROW AMOUNT.

     (a) On the Closing Date, Parent shall deposit the Escrow Amount with the
Escrow Agent.

     (b) Promptly after receipt from Parent of the Escrow Amount, the Escrow
Agent shall confirm to Parent and the Shareholder Representative such receipt in
writing.

     (c) The Escrow Agent agrees to hold and disburse the Escrow Amount solely
as instructed in writing by Parent and/or the Shareholder Representative (as set
forth herein) and to act as Escrow Agent only in accordance with the terms,
conditions and provisions of this Escrow Agreement.

Section 3. DISPOSITION OF ESCROW AMOUNT.

     (a) Each Parent Group Member shall be entitled to receive payment directly
from the Escrow Agent out of the Escrow Amount in the amount specified which, at
any time and from time to time, such Parent Group Member is entitled to be
indemnified,


                                      -2-
   5


reimbursed and held harmless from the Escrow Amount as provided in SECTION 10
hereof, in each case in accordance with the following provisions.

     (i) If any Parent Group Member wishes to make a claim (a "CLAIM") for
     indemnification pursuant to SECTION 10 hereof, to be satisfied from the
     Escrow Amount, such Parent Group Member (individually or collectively, the
     "CLAIMING PARTY") shall so notify the Escrow Agent in writing (the "CLAIM
     NOTICE") of the facts giving rise to such claim for indemnification
     hereunder. Such Claim Notice shall describe in reasonable detail (to the
     extent then known or determinable) each individual Loss or Expense that the
     Claiming Party has paid or reasonably anticipates that it will have to pay,
     the date each such Loss or Expense was paid or incurred (or the basis for
     such anticipated Loss or Expense), the nature of the misrepresentation,
     breach or warranty or claim to which such Loss or Expense related and the
     method of calculating such Loss or Expense. If the Claiming Party is not
     the Surviving Corporation or Parent, the Claim Notice must be accompanied
     by a certificate from the Surviving Corporation or Parent confirming that
     the Claiming Party is a Parent Group Member. At the time of delivery of any
     Claim Notice to the Escrow Agent, a duplicate copy of such Claim Notice
     shall be delivered by the Claiming Party to the Shareholder Representative.
     The Claim Notice shall be accompanied by a certificate of the Claiming
     Party attesting to the Claiming Party's contemporaneous delivery of a
     duplicate copy of the Claim Notice to the Shareholder Representative.

     (ii) Unless the Shareholder Representative shall have delivered an
     Objection (as defined herein) in accordance with SECTION 3(a)(iii), the
     Escrow Agent shall, on the thirtieth (30th) day (or such earlier day as the
     Shareholder Representative shall authorize in writing to the Escrow Agent)
     after receipt of a Claim Notice with respect to indemnification for a
     specified amount, deliver the Escrow Amount as specified in the Claim
     Notice.

     (iii) Until the thirtieth (30th) day following delivery of a Claim Notice,
     the Shareholder Representative may deliver to the Escrow Agent a written
     objection (an "OBJECTION") to the claim made in such Claim Notice. At the
     time of delivery of any Objection to the Escrow Agent, a duplicate copy of
     such Objection shall be delivered to the Claiming Party and to Parent. Any
     such Objection shall be a notice of dispute to either the merits or the
     amount of the Claim or both.

     (iv) Upon receipt of an Objection properly made, the Escrow Agent shall (1)
     deliver the specified portion of the Escrow Amount equal to that portion of
     the amount specified in the Claim Notice, if any, which is not disputed by
     the Shareholder Representative and (2) designate and segregate out of the
     Escrow Amount a portion thereof with a value equal to the amount subject to
     the Claim Notice which is disputed by the Shareholder Representative. Such
     designated and segregated amount shall be deposited into a separate escrow
     sub-account designated the "Disputed Claim Account". Thereafter, the Escrow
     Agent shall not dispose of such segregated and disputed portion of the
     Escrow Amount until the Escrow Agent shall have received a certified copy
     of the final decision of the



                                      -3-
   6


     arbitrators as contemplated by SECTION 3(a)(vi), or the Escrow Agent shall
     have received the written agreement between the Claiming Party and the
     Shareholder Representative resolving such dispute and setting forth the
     amount, if any, which such Claiming Party is entitled to be paid. The
     Escrow Agent will deliver the portion of the Escrow Amount that the
     Claiming Party is entitled to receive as set forth in the arbitration
     decision after the expiration of ten (10) business days from the receipt of
     such decision or, in the event that the amount to which the Claiming Party
     is entitled is established pursuant to an agreement between the Claiming
     Party and the Shareholder Representative, promptly (but not later than ten
     (10) business days) after the Escrow Agent's receipt of such agreement.

     (v) The Claiming Party shall deliver a written response to the Shareholder
     Representative in respect of any Objection properly delivered by the
     Shareholder Representative. If after thirty (30) days following delivery of
     such response there remains a dispute as to any Claims, the Shareholder
     Representative and the Claiming Party shall attempt in good faith for sixty
     (60) days to agree upon the rights of the respective parties with respect
     to each of such claims. If the Shareholder Representative and the Claiming
     Party so agree, a memorandum setting forth such agreement shall be prepared
     and signed by both and shall be furnished to the Escrow Agent and shall
     specify the amount to be distributed to the Claiming Party and the account
     (or sub-account) from which such disbursement shall be made. The Escrow
     Agent shall be entitled to rely conclusively and fully on any such
     memorandum and shall distribute upon such joint written instruction from
     Parent and the Shareholder Representative the specified amount from the
     Escrow Amount in accordance with the terms thereof or in the manner set
     forth herein.

     (vi) If no such agreement can be reached after good faith negotiation,
     either the Claiming Party or the Shareholder Representative may, by written
     notice to the other, demand arbitration of the matter unless the amount of
     the Loss or Expense is at issue in pending litigation with a third party,
     in which event arbitration shall not be commenced until such amount is
     ascertained or both parties have agreed to arbitration; and in either such
     event the matter shall be settled by arbitration conducted in accordance
     with SECTION 15 hereof. The decision of the arbitrator as to the validity
     and amount of any disputed claim in the related Claim Notice shall be
     binding and conclusive and, notwithstanding anything to the contrary in
     this SECTION 3, the Escrow Agent shall conclusively rely on and act in
     accordance with such arbitrator's decision and make or withhold payments
     out of the Escrow Amount in accordance therewith.

     (b) THIRD PERSON CLAIMS. The Claiming Party shall have the right to conduct
and control, through counsel of its choosing, the defense, compromise or
settlement of any third Person claim, action or suit as to which indemnification
will be sought by any Claiming Party pursuant to SECTION 10 hereof, and in any
such case the Shareholder Representative shall cooperate in connection therewith
and shall furnish such records, information and testimony and attend such
conferences, discovery proceedings, hearings, trials and appeals as may be
reasonably requested by the Claiming Party in


                                      -4-
   7


connection therewith; PROVIDED, that the Shareholder Representative may
participate, through counsel chosen by it and at its own expense, in the defense
of any such claim, action or suit as to which the Claiming Party has so elected
to conduct and control the defense thereof; and PROVIDED, FURTHER, that the
Claiming Party shall not, without the written consent of the Shareholder
Representative (which written consent shall not be unreasonably withheld), pay,
compromise or settle any such claim, action or suit, except that no such consent
shall be required if, following a written request from the Claiming Party, the
Shareholder Representative shall fail, within thirty (30) days after the making
of such request, to acknowledge and agree in writing that, if such claim, action
or suit shall be adversely determined, indemnification shall be provided to such
Claiming Party from the Escrow Amount pursuant hereto.

     (c) The Escrow Agent shall not dispose of all or any portion of the Escrow
Amount other than as expressly provided in this Escrow Agreement.

Section 4. DELIVERY OF ESCROW AMOUNT UPON TERMINATION.

     (a) On the date which is eight (8) months after the Effective Date (the
"FIRST DISTRIBUTION DATE") and provided that the aggregate dollar amount of
Claims that have been made up to that date do not exceed $500,000, then, upon
joint written instruction from Parent and the Shareholder Representative, the
Escrow Agent shall deliver to the Shareholders an amount (the "FIRST
DISTRIBUTION AMOUNT") equal to one-half of the remaining Escrow Amount. On the
date which is fifteen (15) months after the Effective Date (the "SECOND
DISTRIBUTION DATE"), upon joint written instruction from Parent and the
Shareholder Representative, the Escrow Agent shall deliver to the Shareholders
an amount specified in such joint written instruction (together with the First
Distribution Amount, the "DISTRIBUTION AMOUNT") equal to (A) the remaining
Escrow Amount, LESS (B) any amount designated as subject to a disputed Claim
pursuant to a Claim Notice to the extent such Claim has not been resolved prior
to such date, LESS (C) the Escrow Agent's Compensation and any Indemnification
Liability (as each is defined in SECTION 6) (to the extent Parent and the
Shareholder Representative have received written statements from the Escrow
Agent of such amounts pursuant to SECTION 6(d)), (D) any amounts paid by the
Company for which it may be reimbursed pursuant to SECTION 6(a) hereof, and LESS
(E) any Shareholder Representative's Expenses (to the extent Parent and the
Escrow Agent shall then have received written notice from the Shareholder
Representative to such effect in accordance with SECTION 7(c) hereof). The
portion of any Distribution Amount due to any Shareholder shall be an amount
(rounded to the nearest cent) equal to a fraction, the numerator of which is the
total amount of the Closing Consideration attributable to such Shareholder
pursuant to the Merger Agreement and the denominator of which is the total
amount of the Closing Consideration.

     (b) Any amounts retained in escrow after the Second Distribution Date shall
be held by the Escrow Agent and shall be used to indemnify Parent Group Members
subject to the terms and conditions of this Escrow Agreement and upon resolution
and payment out of the Escrow Amount in satisfaction of applicable pending
Claims, any remaining amounts in escrow shall, upon joint written instruction
from Parent and the


                                      -5-
   8


Shareholder Representative, be transferred to the Shareholder Representative
with respect to any Shareholder Representative's Expenses (to the extent Parent
and the Escrow Agent shall then have received written notice from the
Shareholder Representative to such effect in accordance with SECTION 7(c)) and
to the Escrow Agent with respect to any Escrow Agent's Compensation and
Indemnification Liability (to the extent Parent and the Shareholder
Representative have received written statements of such amounts pursuant to
SECTION 6(d)) and any remaining amounts shall be distributed to the Shareholders
in accordance with SECTION 4(a).

     (c) Upon distribution of the entire amount of the Escrow Amount, the Escrow
Agent shall give Parent and the Shareholder Representative written notice to
such effect. Such notice shall be given to the address set forth in SECTION 13,
or to such other address as designated pursuant thereto. Upon such distribution,
this Escrow Agreement shall terminate; PROVIDED however that SECTION 6 shall
survive such termination.

     (d) At any time prior to final termination of this Escrow Agreement as
provided in SECTION 4(c), the Escrow Agent shall, if so instructed in a writing
signed by Parent and the Shareholder Representative, release from the Escrow
Amount to Parent the amounts SPECIFIED in such writing.

Section 5. PERMITTED INVESTMENTS; INTEREST.

     The Escrow Agent is hereby authorized and directed to hold the Escrow
Amount in a segregated escrow account and to disburse such Escrow Amount only in
accordance with the express terms of this Escrow Agreement. From the date hereof
until the date of disbursement of the Escrow Amount pursuant to SECTION 4, the
Escrow Agent is authorized and directed to invest and reinvest any Escrow Amount
in such Permitted Investments as Parent and the Shareholder Representative shall
mutually agree and shall jointly instruct the Escrow Agent in writing, so long
as the Escrow Amount is available for disbursement by wire transfer or certified
check within ten (10) business days after the Escrow Agent is instructed and
authorized to release any of the Escrow Amount pursuant to this Escrow
Agreement. In the absence of such an agreement and instructions, the Escrow
Agent agrees to invest and reinvest such funds in Goldman, Sachs FS Prime
Obligations Fund Service Class (464), or a successor or similar fund jointly
agreed to by Parent and the Shareholder Representative in writing and which is a
Permitted Investment. Any interest or other earnings realized from investment of
the Escrow Amounts shall be considered, and be disposed of by the Escrow Agent
as part of, the Escrow Amount. For purposes of this Escrow Agreement, "interest"
on the Escrow Amount shall include all proceeds thereof and investment earnings
with respect thereto. The Escrow Agent shall have full power and authority to
sell any investments held by it under this Escrow Agreement as necessary to make
disbursements under this Escrow Agreement. The Escrow Agent, Parent and the
Shareholder Representative shall not be liable or responsible for any unrealized
profit or realized loss on such investments.


                                      -6-
   9

Section 6. LIABILITY AND COMPENSATION OF ESCROW AGENT.

     (a) The Company and Parent (each an "Indemnifying Party") shall jointly and
severally indemnify and hold the Escrow Agent harmless from and against any and
all liability, damage, judgment, fine, penalty, claim, indemnity, settlement,
cost or expense (other than the Escrow Agent's fees and out-of-pocket expenses
which shall be paid pursuant to the terms of SECTION 6(d) hereof) which may
arise out of any action taken, suffered or omitted by the Escrow Agent in
connection with the acceptance and administration of this Escrow Agreement and
in accordance with the terms of this Escrow Agreement (the "Indemnification
Liability"), except such liability and expense as may result from the gross
negligence or willful misconduct of the Escrow Agent. The Company shall be
entitled to be reimbursed out of the Escrow Amount for all amounts that the
Company is required to pay in respect of any Indemnification Liability. Subject
to the foregoing, each of the Indemnifying Parties shall contribute to the
Indemnification Liability in such proportion as is appropriate to reflect the
relative fault of each individual Indemnifying Party. In all cases where there
is no such basis for allocating contribution for such Indemnification Liability,
one half of the total Indemnification Liability shall be paid out of the Escrow
Amount and one half to the total Indemnification Liability shall be paid by
Parent. The indemnity provided herein shall survive the termination of this
Escrow Agreement and the resignation or removal of the Escrow Agent.

     (b) The Escrow Agent shall not be liable for any action taken, suffered or
omitted or for any loss or injury resulting from its actions or its performance
or lack of performance of its duties hereunder in the absence of gross
negligence or willful misconduct on its part. In no event shall the Escrow Agent
be liable (i) for acting in accordance with or relying upon any instruction,
notice, demand, certificate or document from Parent or the Shareholder
Representative or any entity acting on behalf of either such party so long as
the Escrow Agent reasonably believes such instrument to be genuine and to have
been signed and presented by the proper party or parties, (ii) for any indirect,
consequential, punitive or special damages, regardless of the form of action and
whether or not any such damages were foreseeable or contemplated, (iii) for the
investment or reinvestment of any cash held by it hereunder, in each case in
good faith, in accordance with the terms hereof, including without limitation
any liability for delays (not resulting from its gross negligence or willful
misconduct) in the investment or reinvestment of the Escrow Amount, or any loss
of interest incident to such delays, (iv) for not performing any act or
fulfilling any duty, obligation or responsibility hereunder by reason of any
occurrence beyond the control of the Escrow Agent (including but not limited to
any act or provision of any present or future law or regulation or governmental
authority, any act of God or war, or the unavailability of the Federal Reserve
Bank wire or facsimile or other wire or communication facility) or (v) for an
amount in excess of the value of the Escrow Amount, valued as of the date of
deposit.

     (c) The Escrow Agent shall be entitled to rely on, and shall be fully
protected in acting in reliance upon, any instructions or directions furnished
to it in writing signed by both Parent and the Shareholder Representative
pursuant to any provision of this Escrow Agreement and shall be entitled to
treat as genuine, and as the document it purports to be, any letter, paper or
other document furnished to it by any Parent Group


                                      -7-
   10


Member or the Shareholder Representative, and reasonably believed by the Escrow
Agent to be genuine and to have been signed and presented by the proper party or
parties. In performing its duties hereunder, the Escrow Agent may consult with
counsel to the Escrow Agent and shall be entitled to rely on, and shall be fully
protected in acting in reliance upon, the advice or opinion of such counsel.

     (d) The Escrow Agent shall be entitled to the fees set forth in ANNEX A
hereto for the performance of services by the Escrow Agent hereunder for each
year or any portion thereof that any portion of the Escrow Amount remains in
escrow and shall be reimbursed for reasonable out-of-pocket expenses incurred by
it (including reasonable counsel fees and expenses) in connection with the
performance of such services and for the preparation and execution of this
Escrow Agreement, and any amendments hereto (such fees and expenses are
hereinafter referred to as the "ESCROW AGENT'S COMPENSATION"). Upon a written
request delivered to the Escrow Agent by either Parent or the Shareholder
Representative, or both, the Escrow Agent shall render statements to Parent and
the Shareholder Representative setting forth in detail the Escrow Agent's
Compensation and the basis upon which the Escrow Agent's Compensation was
computed. The Escrow Agent's Compensation shall be paid out of the Escrow Amount
in accordance with SECTION 4(a) hereof.

     (e) The Escrow Agent may resign at any time by giving sixty (60) days
written notice to Parent and the Shareholder Representative; PROVIDED that such
resignation shall not be effective unless and until a successor Escrow Agent has
been appointed and accepts such position pursuant to the terms of this SECTION
6. In such event, Parent and the Shareholder Representative shall appoint a
successor Escrow Agent or, if Parent and the Shareholder Representative are
unable to agree upon a successor Escrow Agent within sixty (60) days after such
notice, the Escrow Agent shall be entitled to appoint its own successor,
provided that such successor is a national banking association having combined
capital and surplus of at least $100,000,000. Such appointment, whether by
Parent and the Shareholder Representative, on the one hand, or the Escrow Agent,
on the other hand, shall be effective on the effective date of the aforesaid
resignation (the "ESCROW TRANSFER DATE"). On the Escrow Transfer Date, all
right, title and interest to the Escrow Amount, including interest thereon,
shall be transferred to the successor Escrow Agent and this Escrow Agreement
shall be assigned by the Escrow Agent to such successor Escrow Agent, and
thereafter, the resigning Escrow Agent shall be released from any further duties
hereunder. The Escrow Agent shall continue to serve until its successor is
appointed and has accepted the duties hereunder and has received the transferred
Escrow Amount.

     (f) The Escrow Agent shall not have any right, claim or interest in any
portion of the Escrow Amount except for its fees, expenses or costs incurred in
its capacity as Escrow Agent hereunder. If any fees, expenses or costs incurred
by, or any obligation owed to, the Escrow Agent or its counsel hereunder are not
promptly paid when due (and assuming no reasonable dispute has been conveyed in
writing to the Escrow Agent by Parent or the Shareholder Representative or both
with respect to such fees, expenses, costs or obligations or the amounts
thereof), the Escrow Agent may reimburse itself therefor from the Escrow Amount
and may sell, convey or otherwise


                                      -8-
   11


dispose of any Permitted Investment for such purpose; provided, that at least
five (5) business days before taking any of the foregoing actions, the Escrow
Agent shall provide written notice to Parent and the Shareholder Representative
of the Escrow Agent's intention to take any such actions. The Escrow Agent may
in its sole discretion withhold from any distribution of the Escrow Amount an
amount it believes is reasonably necessary to compensate the Escrow Agent for
any unpaid amounts to which the Escrow Agent is entitled hereunder.

     (g) The duties and responsibilities of the Escrow Agent shall be limited to
those expressly set forth herein and no duties, responsibilities or obligations
shall be inferred or implied. The Escrow Agent shall not be subject to, nor
required to comply with, any other agreement between Parent and the Shareholder
Representative or to which Parent or the Shareholder Representative is a party,
even though reference thereto may be made herein, or to comply with any
direction or instruction (other than those contained herein or delivered in
accordance with this Escrow Agreement) from Parent or the Shareholder
Representative or any entity acting of such party's behalf. The Escrow Agent
shall not be required to expend or risk any of its own funds or otherwise incur
any financial or other liability in the performance of any of its duties
hereunder.

     (h) If at any time the Escrow Agent is served with any judicial or
administrative order, judgment, decree, writ or other form of judicial or
administrative process which in any way affects the Escrow Amount (including but
not limited to orders of attachment or garnishment or other forms of levies or
injunction or stays relating to the transfer of the Escrow Amount), the Escrow
Agent is authorized to comply therewith in any manner it or legal counsel of its
own choosing deems reasonably appropriate; and if the Escrow Agent complies with
any such judicial or administrative order, judgment, decree, writ or other form
of judicial or administrative process, the Escrow Agent shall not be liable to
any of the parties hereto or to any other person or entity even though such
order, judgment, decree, writ or process may be subsequently modified or vacated
or otherwise determined to have been without legal force or effect.

     (i) As security for the due and punctual performance of any and all of
Parent's and the Shareholder Representative's obligations to the Escrow Agent
hereunder, now or hereafter arising, Parent and the Shareholder Representative
individually and collectively, hereby pledge, assign and grant to the Escrow
Agent a continuing security interest in, and a lien on, the Escrow Amount and
all Permitted Investments therein. The security interest of the Escrow Agent
shall at all times be valid, perfected and enforceable by the Escrow Agent
against Parent and the Shareholder Representative and all third parties in
accordance with the terms of this Escrow Agreement.

     (j) The Escrow Agent shall not be responsible in any respect for the form,
execution, validity, value or genuineness of documents or securities deposited
hereunder or invested herein, or for any description therein, or for the
identity, authority or rights of persons executing or delivering or purporting
to execute or deliver any such document, security or endorsement. The Escrow
Agent shall not be called upon to


                                      -9-
   12


advise any party as to the wisdom of selling or retaining or taking or
refraining from any action with respect to any securities or other property
deposited hereunder.

     (k) At any time the Escrow Agent may request an instruction in writing in
English from Parent and/or the Shareholder Representative and may, at its
option, include in such request the course of action the Escrow Agent proposes
to take and the date on which it proposes to act, regarding any matter arising
in connection with its duties and obligations hereunder. The Escrow Agent shall
not be liable for acting in accordance with such a proposal on or after the date
specified therein, provided that the specified date shall be at least three (3)
business days after Parent and/or the Shareholder Representative receive the
Escrow Agent's request for instruction and its proposed course of action, and
provided further that, prior to so acting, the Escrow Agent has not received the
written instruction requested.

Section 7. SHAREHOLDER REPRESENTATIVE.

     (a) Pursuant to the Merger Agreement, the Shareholder Representative shall
act as the agent of the Shareholders and is entitled to give and receive notices
and communications, to authorize delivery by the Escrow Agent to Parent Group
Members of specified amounts from the Escrow Amount in satisfaction of claims by
Parent Group Members, to object to such deliveries in accordance with the terms
of this Escrow Agreement, to agree to, negotiate, enter into settlements and
compromises of, and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the reasonable judgment of the Shareholder
Representative for the accomplishment of the foregoing. The Person designated to
be Shareholder Representative may be changed in accordance with the provisions
set forth in the Merger Agreement.

     (b) The Shareholder Representative shall not be liable to any holder of
Company Common Stock for any act done or omitted under the Merger Agreement or
hereunder as Shareholder Representative while acting in good faith and in the
exercise of reasonable judgment, and any act done or omitted pursuant to the
written advice of counsel shall be conclusive evidence of such good faith.

     (c) No bond shall be required of the Shareholder Representative and the
Shareholder Representative shall receive no compensation for his services
hereunder. At least five (5) days prior to the first anniversary of the
Effective Date, the Shareholder Representative shall deliver written notice to
the Escrow Agent and Parent setting forth the payment amount of the reasonable
out-of-pocket expenses incurred by the Shareholder Representative in connection
with his duties under the Merger Agreement and hereunder (the "SHAREHOLDER
REPRESENTATIVE'S EXPENSES"), which expenses shall be reimbursed from the Escrow
Amount upon written instruction of Parent and the Shareholder Representative to
the extent that any such Shareholder Representative's Expenses together with any
other Acquisition Expenses exceed $200,000.

     (d) Neither Parent, any Parent Group Member, nor the Escrow Agent shall be
responsible or liable for any actions taken, suffered or omitted by the
Shareholder


                                      -10-
   13


Representative in connection with such Shareholder Representative's capacity as
such, and each of them may conclusively and fully rely on any action or writing
of the Shareholder Representative.

     (e) A decision, act, consent or instruction of the Shareholder
Representative shall constitute a decision of all Shareholders and shall be
final, binding and conclusive upon each such Shareholder, and the Escrow Agent
and Parent may conclusively and fully rely upon any decision, act, consent or
instruction of the Shareholder Representative as being the decision, act,
consent or instruction of each and every such Shareholder without any further
inquiry or investigation. The Escrow Agent and each Parent Group Member are
hereby fully indemnified and relieved from any responsibility or liability to
any Person for any actions taken, suffered or omitted by them in accordance with
such decision, act, consent or instruction of the Shareholder Representative.

Section 8. TAXES.

     (a) All interest and net gains earned on the Escrow Amount shall be
accounted for by the Escrow Agent separately from the Escrow Amount and shall be
treated as having been received by Parent and included in its income for tax
purposes. The Escrow Agent shall, consistent with such treatment, arrange that
for income tax reporting and withholding purposes Parent is named or treated as
the payee of such amounts. In this regard, Parent shall provide the Escrow Agent
with any certifications or forms required under any applicable tax law.

     (b) The parties agree that any distribution of the Escrow Amount to a
Shareholder shall be treated for tax purposes as a payment pursuant to a
contingent debt instrument issued by Parent as part of the Merger Consideration
(as defined in the Merger Agreement). The portion of the distribution which the
parties shall treat as interest for tax purposes shall be the greater of (i) the
amount of the distribution multiplied by a fraction, the numerator of which is
the interest (within the meaning of SECTION 5 hereof) on the initial Escrow
Amount to the date of the distribution and the denominator of which is the
Escrow Amount on such date, or (ii) such larger amount as Parent determines must
be reported as interest under section 1274 of the Code (as defined in the Merger
Agreement) and the regulations thereunder or other applicable tax law.

Section 9. REPRESENTATIONS AND WARRANTIES.

     (a) Each of Parent and the Company represents and warrants to each of the
other parties hereto that it is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of formation; that it
has the corporate power and authority to execute and deliver this Escrow
Agreement and to perform its obligations hereunder; that the execution, delivery
and performance of this Escrow Agreement by it has been duly authorized and
approved by all necessary corporate action; that this Escrow Agreement
constitutes its legal, valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be


                                      -11-
   14


limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other similar laws affecting the enforcement of creditors' rights generally and
by the effect of general principles of equity (regardless of whether enforcement
is considered in a proceeding in equity or at law); and that the execution,
delivery and performance of this Escrow Agreement by it will not result in a
breach of or loss of rights under or constitute a default under or a violation
of any trust (constructive or other), agreement, judgment, decree, order or
other instrument to which it is a party or it or its properties or assets may be
bound.

     (b) The Shareholder Representative represents to each of the other parties
hereto that he has the power and authority to execute and deliver this Escrow
Agreement and to perform his obligations hereunder; that this Escrow Agreement
constitutes his legal, valid and binding obligation, enforceable against him in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting the enforcement of creditors' rights generally and by the effect of
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law); and that the execution, delivery and
performance of this Escrow Agreement by him will not result in a breach of or
loss of rights under or constitute a default under or a violation of any trust
(constructive or other), agreement, judgment, decree, order or other instrument
to which he is a party or his properties or assets may be bound.

Section 10. INDEMNIFICATION PROVISIONS AND PAYMENT OF NET WORTH ADJUSTMENT
            AMOUNT.

     (a) INDEMNIFICATION. Each Parent Group Member shall be indemnified, held
harmless and reimbursed from the Escrow Amount from and against any and all Loss
and Expense incurred by such Parent Group Member in connection with or arising
from:

     (i) any breach by the Company of any of its covenants or its failure to
     perform any of its obligations in the Merger Agreement;

     (ii) any breach of any warranty or the inaccuracy of any representation of
     the Company contained or referred to in the Merger Agreement or any
     certificate delivered by or on behalf of the Company pursuant hereto;

     (iii) any breach of any warranty or the inaccuracy of any representation of
     the Shareholder Representative contained or referred to in this Escrow
     Agreement or the Merger Agreement or any certificate delivered by the
     Shareholder Representative pursuant hereto or pursuant to the Merger
     Agreement;

     (iv) any breach by the Shareholder Representative of any of its covenants
     or failure to perform any of its obligations under this Escrow Agreement or
     the Merger Agreement;

     (v) any failure by the Company or the Shareholder Representative to obtain,
     prior to the Closing, any consent set forth in Schedule 5.3 of the Merger
     Agreement;


                                      -12-
   15


     (vi) the payment by the Company of Acquisition Expenses and Shareholder
     Representative's Expenses in excess of $200,000;

     (vii) any payment by the Company in excess of insurance costs resulting
     from claims disclosed in Schedule 5.21 of the Merger Agreement.

     (viii) any payments to be made by the Shareholders pursuant to Section
     3.2(d) of the Merger Agreement; or

     (ix) any Losses and Expenses incurred by any Parent Group Member in
     connection with or arising from the exercise of appraisal rights pursuant
     to the WBCA by any holders of capital stock of the Company (including,
     without limitation, all Losses and Expenses associated with any appraisal
     proceedings and all amounts determined to be payable to any such holders
     pursuant to Chapter 23B.13 of the WBCA) to the extent that such Losses and
     Expenses exceed the product of (x) the number of Dissenters' Shares and (y)
     the Purchase Price divided by the number of shares of Company Common Stock
     (other than such shares held by Parent) outstanding at the Effective Time;

PROVIDED, HOWEVER, that the Escrow Amount shall be used to indemnify and hold
harmless hereunder with respect to clauses (ii) and (iii) of this sentence with
respect to Losses and Expenses incurred by Parent Group Members (other than any
Loss or Expense incurred as a result of inaccuracies of the representations and
warranties contained in SECTIONS 5.1 (Organization and Capital Structure), 5.3
(Authority), 5.7 (Taxes), 5.15 (Intellectual Property; Software), 5.16 (Title to
Property), 5.21 (Litigation), 5.22 (Environmental Matters) and 5.28 (No Finder)
of the Merger Agreement, as to which this proviso shall not apply) unless and
until and only to the extent that the aggregate amount of such Losses and
Expenses exceeds $500,000. Any payment pursuant to this SECTION 10(a) shall be
made in the form of a transfer from the Escrow Amount to the applicable Parent
Group Member(s) pursuant to SECTION 3(a).

     (b) LENGTH OF INDEMNITY. The indemnification provided for in this SECTION
10 shall terminate fifteen (15) months after the Effective Date (and no claims
shall be made by any Parent Group Member under this SECTION 10 thereafter),
except that such indemnification shall continue as to any Loss or Expense in
connection with which a Claim Notice is given in accordance with the
requirements of SECTION 3(a)(i) on or prior to the date on which such
indemnification obligation would otherwise terminate in accordance with this
SECTION 10, as to which the indemnification obligation hereunder shall continue
until the liability to be satisfied from the Escrow Amount shall have been
determined pursuant to this SECTION 10, and all Parent Group Members shall have
been reimbursed out of the Escrow Amount for such Loss or Expense in accordance
with the terms hereof.

     (c) EXCLUSIVE REMEDY. Except for fraud and remedies that cannot be waived
as a matter of law and injunctive and provisional relief, the Escrow Amount
shall be the sole and exclusive remedy available to Parent Group Members for
Losses and Expenses.


                                      -13-
   16


     (d) NET WORTH ADJUSTMENT AMOUNT. Promptly after the final and binding
determination of the Purchase Price pursuant to Section 3.2 of the Merger
Agreement and upon receipt of notice jointly executed by Parent and the
Shareholder Representative, the Escrow Agent shall deliver to Parent the Net
Worth Adjustment Amount.

Section 11. BENEFIT; SUCCESSOR AND ASSIGNS.

     This Escrow Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns but shall
not be assignable by any party hereto without the written consent of all of the
other parties hereto; PROVIDED, HOWEVER, that Parent may assign its rights and
delegate its obligations hereunder to any of its Affiliates and that the Escrow
Agent may assign its rights hereunder to a successor Escrow Agent appointed
hereunder. Except for Parent Group Members and Persons specified in the
preceding sentence, this Escrow Agreement is not intended to confer on any
person not a party hereto any rights or remedies hereunder.

Section 12. TERMINATION.

     This Escrow Agreement may only be terminated following the delivery of all
amounts held in the Escrow Amount and the delivery of notice by the Escrow Agent
as contemplated by SECTION 4(c) hereof.

Section 13. NOTICES.

     All notices or other communications required or permitted hereunder shall
be in writing and shall be deemed given or delivered when delivered personally
or four days after being mailed by registered or certified mail, return receipt
requested, or one day after being sent by private prepaid overnight courier
addressed as follows:

                  IF TO THE ESCROW AGENT:

                  Citibank, N.A.
                  111 Wall Street
                  14th Floor, Zone 3
                  New York, New York  10005
                  Attention:  Citibank Agency & Trust Services


                  IF TO PARENT, THE COMPANY OR ANY OTHER PARENT GROUP MEMBER:

                  Harris Corporation
                  1025 West NASA Blvd.
                  Melbourne, FL  32919
                  Attention:  Richard Ballantyne


                                      -14-
   17

                  WITH A COPY TO:

                  Harris Corporation
                  330 Twin Dolphin Drive
                  Redwood Shores, CA  94065
                  Attention:  Samuel Wyman

                  AND

                  Sidley & Austin
                  Bank One Plaza
                  10 South Dearborn Street
                  Chicago, IL  60603
                  Attention:  David J. Zampa


                  IF TO THE SHAREHOLDER REPRESENTATIVE:

                  Thomas T. van Overbeek
                  10163 Miguelita Road
                  San Jose, CA  95127


                  WITH COPY TO:

                  Venture Law Group
                  4750 Carillon Group
                  Kirkland, WA  98033
                  Attention:  Craig E. Sherman

or such other address as the Escrow Agent, Parent or the Shareholder
Representative, as the case may be, shall designate in writing to the parties
hereto. Notwithstanding anything contained in this SECTION 13 to the contrary,
the Escrow Agent shall not be deemed to have received any notice unless and
until it has actually received such notice.

Section 14. GOVERNING LAW.

     This Escrow Agreement shall be governed by and construed in accordance with
the laws of the State of New York other than and without reference to conflict
of law rules or principles.

Section 15. DISPUTE RESOLUTION.

     (a) In the event of any controversy, claim or dispute between or among
Parent, the Company and the Shareholder Representative arising out of or
relating to this Agreement or the Merger Agreement, or any alleged breach
thereof, Parent, the Company and the Shareholder Representative shall submit
such dispute to non-binding


                                      -15-
   18


mediation in the City of Seattle, State of Washington for a period of 60 days
prior to initiating any legal action in connection therewith, provided that
nothing herein shall prevent the party seeking enforcement from seeking
temporary or preliminary injunctive relief hereunder from a state or federal
court sitting in the City of Seattle, State of Washington (which court shall
have exclusive jurisdiction over any such request for relief) to the extent
necessary to protect itself from any irreparable harm that it would suffer
during the 60-day mediation period. If Parent, the Company and the Shareholder
Representative are unable to agree upon a mediator within five (5) business days
after receipt of written notice of a claim, either party may apply to the
American Arbitration Association for the appointment of a mediator, which
appointment shall be final and binding on both parties. The mediation shall be
conducted pursuant to the mediation rules of the American Arbitration
Association then in effect, unless Parent, the Company and the Shareholder
Representative agree to an alternative procedure. Parent, the Company and the
Shareholder Representative shall participate in good faith in such mediation,
shall bear its own costs of such mediation and shall share the cost of the
mediator equally.

     If any dispute cannot be resolved pursuant to the preceding paragraph
within the 60-day mediation period, either Parent or the Shareholder
Representative may demand, within 30 days after the end of the 60-day mediation
period, that the dispute be submitted to binding arbitration by so notifying
such other parties in writing (the "ARBITRATION"). The Arbitration shall be
conducted in the City of Seattle, State of Washington, before a single
arbitrator. The arbitrator shall be appointed, and the Arbitration shall be
conducted, under the rules of the American Arbitration Association in effect at
the time of such arbitration, provided that the arbitrator shall have no power
to award punitive or exemplary damages to any party to the Arbitration. The
arbitrator's decision shall be final, conclusive and binding on the parties to
the Arbitration, shall be enforceable in any court of competent jurisdiction,
and shall be the exclusive forum for any claims arising out of this Agreement or
the subject matter hereof.

Section 16. COUNTERPARTS.

     This Escrow Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

Section 17. HEADINGS.

     The section headings contained in this Escrow Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Escrow Agreement.

Section 18. PARTIAL INVALIDITY.

     Wherever possible, each provision hereof shall be interpreted in such
manner as to be effective and valid under applicable law, but in case any one or
more of the provisions contained herein shall, for any reason, be held to be
invalid, illegal or


                                      -16-
   19


unenforceable in any respect, such provision shall be ineffective in the
jurisdiction involved to the extent, but only to the extent, of such invalidity,
illegality or unenforceability without invalidating the remainder of such
invalid, illegal or unenforceable provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.

Section 19. ENTIRE AGREEMENT; MODIFICATION AND WAIVER.

     This Escrow Agreement and the Merger Agreement embody the entire agreement
and understanding among Parent, the Company and the Shareholder Representative
with respect to the subject matter hereof and supersede any and all prior
agreements and understandings relating to the subject matter hereof. No
amendment, modification or waiver of this Escrow Agreement shall be binding or
effective for any purpose unless it is made in a writing signed by the party
against whom enforcement of such amendment, modification or waiver is sought. No
course of dealing between the parties to this Escrow Agreement shall be deemed
to affect or to modify, amend or discharge any provision or term of this Escrow
Agreement. No delay by any party to or any beneficiary of this Escrow Agreement
in the exercise of any of its rights or remedies shall operate as a waiver
thereof, and no single or partial exercise by any party to or any beneficiary of
this Escrow Agreement of any such right or remedy shall preclude any other or
further exercise thereof. A waiver of any right or remedy on any one occasion
shall not be construed as a bar to or waiver of any such right or remedy on any
other occasion.


                                      -17-
   20


     IN WITNESS WHEREOF, the parties hereto have duly executed this Escrow
Agreement as of the date first above written.


                                       CITIBANK, N.A.


                                       By:  /s/ Michael L. Stevenson
                                          --------------------------------------
                                            Name: Michael L. Stevenson
                                            Title: Vice President



                                       HARRIS CORPORATION


                                       By:  /s/ Bryan R. Roub
                                          --------------------------------------
                                            Name: Bryan R. Roub
                                            Title: Senior Vice President and
                                                     Chief Financial Officer



                                       WAVTRACE, INC.


                                       By:  /s/ Thomas T. van Overbeek
                                          --------------------------------------
                                            Name: Thomas T. van Overbeek
                                            Title: President and Chief Executive
                                                     Officer



                                            /s/ Thomas T. van Overbeek
                                       -----------------------------------------
                                       THOMAS T. VAN OVERBEEK
                                       AS SHAREHOLDER REPRESENTATIVE




                                      -18-

EX-23.1

   1

                                                                    Exhibit 23.1


               Consent of Ernst & Young LLP, Independent Auditors

We consent to the incorporation by reference in the: (a) Registration Statement
(Form S-8 No. 33-50169) pertaining to the Retirement Plan of Harris Corporation,
(b) Registration Statements (Form S-8 No. 33-37969) (Form S-8 No. 33-51171)
(Form S-8 No. 333-7985) pertaining to the Stock Incentive Plan of Harris
Corporation, (c) Registration Statement (Form S-3 No. 333-03111) pertaining to
the issuance of $250,000,000 Debt Securities, and (d) Registration Statement
(Form S-3 No. 333-66241) pertaining to the issuance of $500,000,000 Debt
Securities, of our report dated July 19, 2000 with respect to the financial
statements of Wavetrace, Inc. included in this Current Report (Form 8-K) of
Harris Corporation. Filed September 14, 2000.



                                                               ERNST & YOUNG LLP



September 14, 2000
Seattle, Washington

EX-99.1

   1


                                                                    EXHIBIT 99.1
                                                                    ------------

                       HARRIS CORPORATION INCREASES STAKE
                      IN BROADBAND WIRELESS ACCESS MARKETS
                       WITH ACQUISITION OF WAVTRACE, INC.


BELLEVUE, Washington, August 31, 2000 - Harris Corporation (NYSE: HRS), today
announced that it has completed the previously announced purchase of Wavtrace,
Inc., a privately held, Bellevue, Washington-based pioneer and leading developer
of broadband wireless access systems. Harris officials noted in ceremonies at
the Bellevue facilities that the acquisition significantly elevates its
participation in fast-growing markets for infrastructure systems that provide
high-speed wireless access to the Internet and other data, voice, and video
services.

"We intend to become the leading supplier of microwave products and services for
network solutions worldwide," said Phillip W. Farmer, chairman and CEO of
Harris. "The acquisition of Wavtrace provides us with leading technology for BWA
(broadband wireless access) point-to-multipoint (PMP) products, and positions
Harris to be the leader in BWA products and solutions. Wavtrace's high-frequency
products are an excellent complement to our current low-frequency PMP product
line and our industry-leading point-to-point microwave radio systems. We have
the broadest, most robust product offering in the industry and the capability to
provide our customers with complete, one-stop shopping as they build and expand
their wireless communications networks."

Wavtrace is developing a broadband PMP system for millimeter wave transmissions
based on TDD (time division duplexing) technology, which is ideal for
transporting high-speed bursts of data traffic, such as that found on the
Internet, in a spectrum-efficient manner. "TDD has gained recognition in the
industry as the most appropriate technology for LMDS (local multipoint
distribution system) broadband wireless access," Farmer said. Wavtrace is
successfully testing its product in Europe and the U.S. and is expected to
release


   2


a production product next spring that will incorporate adaptive TDD
capabilities. The product is expected to have the fastest burst modem in the
industry, enabling the delivery of multimedia services at speeds up to 180 Mbps
per user, four times as fast as competing systems.

Harris purchased approximately a 20 percent interest in Wavtrace in June 1999
and has been working with the company to develop point-to-multipoint BWA
systems. Pursuant to the transaction which was closed today, Harris purchased
the remainder of Wavtrace for approximately $134 million.

Wavtrace employs approximately 110 people, including 80 engineers, at its
Bellevue facilities. Wavtrace will become part of Harris' Microwave
Communications Division, headquartered in Redwood Shores, California, and the
Wavtrace product will become part of Harris' ClearBurst(TM) BWA product line.

Harris Corporation (NYSE: HRS) is an international communications equipment
company providing product, system, and service solutions for wireless,
broadcast, network support, and government markets. The Microwave Communications
Division, one of five divisions within Harris Corporation, is the largest
supplier of microwave and broadband wireless access systems in North America.
The division delivers wireless solutions to telecom service providers of all
types, and its product line -- the broadest in the industry -- covers frequency
bands up to 42 GHz. Harris has sales and service facilities in nearly 90
countries.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements that reflect management's
current expectations, assumptions and estimates of future performance and
economic conditions. Such statements are made in reliance upon the safe harbor
provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Harris cautions investors that any
forward-looking statements are subject to risks and uncertainties that may cause
actual results and future trends to differ materially from those matters
expressed in or implied by such forward-looking statements. Statements about the
expected date of product releases, and the impact of the transaction on Harris'
business and its microwave business are forward-looking and involve risks and
uncertainties. Other factors that may impact the company's results and
forward-looking statements may be disclosed in the company's filings with the
SEC. Harris


   3


disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.


                                       ###