AGREEMENT AND PLAN OF MERGER



        THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered

into as of July 28, 2000, by and among Immersion Corporation, a Delaware

corporation ("Parent"), VT Acquisition, Inc., a California corporation and a

wholly owned subsidiary of Parent ("Merger Sub"), Virtual Technologies, Inc., a

California corporation (the "Company"), and James F. Kramer, as the

representative of the Company's shareholders (the "Shareholder Representative"),

with reference to the following facts:



        A. The respective Boards of Directors of Parent, Merger Sub and the

Company have each determined that it is advisable for Parent to acquire the

Company upon the terms and subject to the conditions set forth in this

Agreement.



        B. In furtherance of such combination, the Boards of Directors of

Parent, Merger Sub and the Company have each approved this Agreement and the

merger of Merger Sub with and into the Company (the "Merger") in accordance with

the applicable provisions of the California General Corporation Law (the "CGCL")

and upon the terms and subject to the conditions set forth in this Agreement.



        C. For federal income tax purposes, it is intended that the Merger

qualify as a reorganization within the meaning of Section 368(a) of the Internal

Revenue Code of 1986, as amended (the "Code"), and this Agreement is hereby

adopted as a plan of reorganization for purposes of Section 368 of the Code.



        D. For financial accounting purposes, it is intended that the Merger be

accounted for as a purchase transaction.



        ACCORDINGLY, in consideration of the foregoing and the following

representations, warranties, covenants and agreements, and intending to be

legally bound hereby, the parties agree as follows:



                                    ARTICLE I



                                   THE MERGER



        1.1 THE MERGER. At the Effective Time (as defined in Section 1.3), and

subject to and upon the terms and conditions of this Agreement and the

applicable provisions of the CGCL, (i) Merger Sub will be merged with and into

the Company; (ii) the separate corporate existence of Merger Sub will cease; and

(iii) the Company will be the surviving corporation (the "Surviving

Corporation").



        1.2 THE CLOSING. The closing of the Merger and the other transactions

contemplated by this Agreement (the "Closing") will take place at 10:00 a.m.,

local time, at the



<PAGE>   2



offices of Heller Ehrman White & McAuliffe LLP, 525 University Avenue, Palo

Alto, California, on a date to be specified by the parties (the "Closing Date"),

which date will be the date on which all the conditions set forth in Article VII

are satisfied or waived, unless another date, time or place is agreed to in

writing by the parties.



        1.3 EFFECTIVE TIME. On the Closing Date, the parties will cause the

Merger to be consummated by filing an agreement of merger (the "Agreement of

Merger"), together with the required officers' certificates, with the California

Secretary of State, in the forms required by, and executed in accordance with,

the applicable provisions of the CGCL (the time of such filing being the

"Effective Time").



        1.4 EFFECT OF THE MERGER. The effect of the Merger will be as provided

in this Agreement, the Agreement of Merger and the applicable provisions of the

CGCL. Without limiting the generality of the foregoing, and subject thereto, at

the Effective Time, all the property, rights, privileges, powers and franchises

of the Company and Merger Sub will vest in the Surviving Corporation, and all

debts, liabilities and duties of the Company and Merger Sub will become the

debts, liabilities and duties of the Surviving Corporation.



        1.5 ARTICLES OF INCORPORATION; BYLAWS. At the Effective Time, the

Articles of Incorporation and Bylaws of Merger Sub, as in effect immediately

prior to the Effective Time, will be the Articles of Incorporation and Bylaws of

the Surviving Corporation (except that the corporate name will be changed to

Virtual Technologies, Inc.), until thereafter amended in accordance with the

CGCL and such Articles of Incorporation and Bylaws.



        1.6 DIRECTORS AND OFFICERS. The directors and officers of Merger Sub

immediately prior to the Effective Time will be the initial directors and

officers of the Surviving Corporation, each to hold office in accordance with

the Articles of Incorporation and Bylaws of the Surviving Corporation and until

their respective successors are duly elected or appointed and qualified.



        1.7 FURTHER ACTION AFTER THE EFFECTIVE TIME. If, at any time after the

Effective Time, any such further action is necessary or desirable to carry out

the purposes of this Agreement and to vest the Surviving Corporation with full

right, title and possession to all assets, property, rights, privileges, powers

and franchises of the Company and Merger Sub, the officers and directors of the

Company and Merger Sub immediately prior to the Effective Time are fully

authorized in the name of their respective corporations or otherwise to take,

and will take, all such lawful and necessary action.





                                       2

<PAGE>   3



                                   ARTICLE II



                              CONVERSION OF SHARES



        2.1 EFFECT ON STOCK. At the Effective Time, by virtue of the Merger and

without any action on the part of the Company, Merger Sub or the holders of any

securities of the Company or Merger Sub, the following will occur:



            (a) CONVERSION OF COMPANY STOCK. Each share of the Company's common

stock ("Company Common Stock") issued and outstanding immediately prior to the

Effective Time (other than any shares to be cancelled pursuant to Section

2.1(d)) will, subject to Sections 2.1(b), 2.1(c), 2.1(e) and 2.1(f), be

automatically converted into the right to receive (i) that percentage of a share

of the Parent's common stock, $0.001 par value per share ("Parent Common

Stock"), equal to the "Exchange Ratio" (as defined in Section 2.1(b)), and (ii)

the "Per Share Cash Amount" (as defined in Section 2.1(b)).



            (b) DETERMINATION OF THE EXCHANGE RATIO AND PER SHARE CASH AMOUNT.

For purposes of this Agreement:



                (i) The "Per Share Value" will be equal to the average of the

closing sale prices of a share of Parent Common Stock on the Nasdaq Stock Market

("Nasdaq") for the five trading days immediately preceding the Effective Time.



                (ii) The "Total Value" will be equal to 400,000 multiplied by

the Per Share Value, reduced by the full amount of any Excess Fees and Expenses

(as defined in Section 7.2(p)).



                (iii) The "Outstanding Company Shares" will be equal to the

total number of shares of Company Common Stock issued and outstanding

immediately prior to the Effective Time (other than any shares to be cancelled

pursuant to Section 2.1(d)).



                (iv) The "Stock Fraction" will be equal to a fraction, the

numerator of which is equal to the Outstanding Company Shares and the

denominator of which is equal to the sum of the Outstanding Company Shares and

that number of shares of Company Common Stock issuable on exercise of all

options to purchase shares of Company Common Stock that are outstanding

immediately prior to the Effective Time



                (v) The "Merger Consideration" will be equal to the Total Value

multiplied by the Stock Fraction.



                (vi) The "Merger Cash Amount" will be equal to the lesser of (i)

$1,500,000 multiplied by the Stock Fraction; or (ii) the Merger Consideration

multiplied by the applicable percentage below:







                                       3

<PAGE>   4



                    (A) 15%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,706,149;



                    (B) 14%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,651,427, but less than

4,706,149;



                    (C) 13%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,597,962, but less than

4,651,427;



                    (D) 12%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,545,713, but less than

4,597,962;



                    (E) 11%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,494,637, but less than

4,545,713;



                    (F) 10%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,444,697, but less than

4,494,637;



                    (G) 9%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,395,854, but less than

4,444,697;



                    (H) 8%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,348,073, but less than

4,395,854;



                    (I) 7%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,301,319, but less than

4,348,073;



                    (J) 6%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,255,561, but less than

4,301,319;



                    (K) 5%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,210,765, but less than

4,255,561;





                                       4

<PAGE>   5



                    (L) 4%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,166,903, but less than

4,210,765;



                    (M) 3%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,123,945, but less than

4,166,903;



                    (N) 2%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,081,864, but less than

4,123,945;



                    (O) 1%, if the number of Outstanding Company Shares voting

in favor of the Merger is equal to or greater than 4,040,663, but less than

4,081,864; or



                    (P) 0%, if none of immediately preceding clauses (A) through

(O) applies.



                (vii) The "Per Share Cash Amount" will be equal to the Merger

Cash Amount divided by the Outstanding Company Shares.



                (viii) The "Merger Shares" will be equal to the Merger

Consideration minus the Merger Cash Amount, divided by the Per Share Value.



                (ix) The "Exchange Ratio" will be equal to the Merger Shares

divided by the Outstanding Company Shares.



                (x) The Exchange Ratio will be adjusted to reflect the effect of

any stock split, reverse split, stock dividend (including any dividend or

distribution of securities convertible into Parent Common Stock),

reorganization, recapitalization or other like change with respect to Parent

Common Stock occurring after the date of this Agreement and prior to the

Effective Time.



            (c) ESCROWED SHARES. An aggregate of 60,000 shares (the "Escrowed

Shares") of Parent Common Stock to be issued in the Merger will be held in

escrow by U.S. Trust Company, N. A. (the "Escrow Agent") under an Escrow

Agreement, in substantially the form attached as EXHIBIT A to this Agreement

(the "Escrow Agreement"). The Escrowed Shares will be contributed to the escrow

pro rata based on the number of shares of Parent Common Stock that each Company

shareholder would have been entitled to receive but for the creation of such

escrow. At the Effective Time, the Company's shareholders will be deemed to have

received and deposited with the Escrow Agent the Escrowed Shares, without any

act by the Company's shareholders. The adoption of this Agreement and the

approval of the Merger by the Company's shareholders will constitute the

approval of the Company shareholders' of the Escrow Agreement and





                                       5

<PAGE>   6



of all the arrangements relating thereto, including the placement of the

Escrowed Shares in escrow, the appointment of James F. Kramer as the Shareholder

Representative in Article IX of this Agreement and any obligations of, or

payments due by, such shareholders under this Agreement or the Escrow Agreement

(including the payment of the Unanticipated Fees and Expenses (as defined in

Section 10.3)).



            (d) CANCELLATION. Each share of Company Common Stock held by the

Company or owned by Parent, Merger Sub or any direct or indirect wholly owned

subsidiary of the Company or Parent, immediately prior to the Effective Time

will be automatically cancelled and retired and will cease to exist, without

payment of any consideration therefor.



            (e) DISSENTING SHARES. Any holder of Company Common Stock with

respect to which dissenters' rights are granted by reason of the Merger under

the CGCL, who does not vote to approve the Merger and who otherwise complies

with Chapter 13 of the CGCL ("Dissenting Shares"), will not be entitled to

receive that number of shares of Parent Common Stock or that amount of cash

(including any cash in lieu of fractional shares) that such holder is entitled

to receive in the Merger, all in accordance with this Article II, and will be

entitled to receive only the payment provided for by Chapter 13 of the CGCL,

unless such holder fails to perfect, effectively withdraws or loses his or her

right to dissent from the Merger under the CGCL. If any such holder so fails to

perfect, effectively withdraws or loses his or her dissenters' rights under the

CGCL, his or her Dissenting Shares will thereupon be deemed to have been

converted, as of the Effective Time, into the right to receive that number of

shares of Parent Common Stock and that amount of cash that such holder is

entitled to receive in the Merger, less the shares being escrowed, plus any cash

in lieu of fractional shares, all in accordance with this Article II. Any

payments relating to Dissenting Shares will be made solely by the Surviving

Corporation, and no funds or other property will be provided by Merger Sub or

any of Parent's other direct or indirect subsidiaries.



            (f) CASH IN LIEU OF FRACTIONAL SHARES. No fraction of a share of

Parent Common Stock will be issued by virtue of the Merger. Instead, each holder

of shares of Company Common Stock who would otherwise be entitled to a fraction

of a share of Parent Common Stock (after aggregating all fractional shares of

Parent Common Stock to be received by such holder) will receive from Parent an

amount of cash (rounded down to the nearest whole cent) equal to the product of

such fraction, multiplied by the Per Share Value, without interest thereon.



            (g) CONVERSION OF MERGER SUB STOCK. Each share of common stock of

Merger Sub issued and outstanding immediately prior to the Effective Time will

be converted into and exchanged for one validly issued, fully paid and

nonassessable share of common stock of the Surviving Corporation.





                                       6

<PAGE>   7



        2.2 COMPANY STOCK OPTIONS. At the Effective Time, Parent will, to the

full extent permitted by applicable law, assume all outstanding options to

purchase shares of Company Common Stock (the "Company Stock Options") granted

under the Virtual Technologies, Inc. 1997 Stock Option Plan (the "Company Stock

Option Plan"). Each outstanding Company Stock Option, whether or not exercisable

at the Effective Time, will, to the full extent permitted by applicable law, be

assumed by Parent so that it will be exercisable upon the same terms and

conditions as under the Company Stock Option Plan and the applicable option

agreement issued thereunder; provided, however, that (i) such option will

thereafter be exercisable for (A) a number of shares of Parent Common Stock

(rounded down to the nearest whole share) equal to the number of shares of

Company Common Stock issuable under such Company Stock Option multiplied by the

Exchange Ratio and (B) an amount of cash equal to the Per Share Cash Amount

multiplied by the number of shares of Company Common Stock issuable under such

Company Stock Option, and (ii) the option exercise price per share will

thereafter be equal to the option exercise price per share under such Company

Stock Option divided by the Exchange Ratio.



        2.3 EXCHANGE OF CERTIFICATES.



            (a) EXCHANGE PROCEDURES. At the Closing, each holder of a

certificate or certificates which represented shares of Company Common Stock

immediately prior to the Effective Time, other than Dissenting Shares, will

surrender such certificate(s), accompanied by a properly completed letter(s) of

transmittal (which will be in such form as Parent may reasonably specify), and

such other customary documents as may be required pursuant to such letter(s) of

transmittal, to Parent (or an exchange agent selected by Parent in its sole

discretion). As soon as reasonably practicable (and in any event no later than

30 days) after the later of such surrender and the date on which the California

Secretary of State issues a certified copy of the filed Agreement of Merger,

such holder will be entitled to receive in exchange therefor a certificate

evidencing that number of shares of Parent Common Stock and that amount of cash

(without interest thereon) that such holder is entitled to receive in the

Merger, less the shares being escrowed, plus any cash in lieu of fractional

shares (without interest thereon), all in accordance with this Article II. Until

properly surrendered, each outstanding certificate that, prior to the Effective

Time, represented shares of Company Common Stock, other than Dissenting Shares,

will be deemed from and after the Effective Time, for all corporate purposes,

subject to Section 2.3(b), to evidence the right to receive that number of

shares of Parent Common Stock and that amount of cash (without interest thereon)

that such holder is entitled to receive in the Merger, less the shares being

escrowed, plus any cash in lieu of fractional shares (without interest thereon)

all in accordance with this Article II. Shares of Parent Common Stock issued in

the Merger will be issued as of and deemed to be outstanding as of the Effective

Time.







                                       7

<PAGE>   8



            (b) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends

or other distributions declared or made with respect to the Parent Common Stock

with a record date after the Effective Time will be paid to the holders of any

unsurrendered Company certificates until such holders properly surrender such

Company certificates. Upon a holder's surrender of any such Company certificates

(along with properly completed letters of transmittal and such other customary

documents as may be required in accordance with Section 2.3(a)), there will be

paid to that holder, promptly (and in any event no later than 30 days) after

such surrender, the amount of dividends or other distributions, excluding

interest thereon, declared with a record date after the Effective Time and not

paid because of the failure to properly surrender the Company certificates for

exchange.



            (c) NO LIABILITY. Neither Parent, Merger Sub nor the Company will be

liable to any holder of Company Common Stock immediately prior to the Merger for

any shares of Parent Common Stock or cash delivered to a public official

pursuant to any applicable abandoned property, escheat or similar law.



            (d) WITHHOLDING RIGHTS. Parent will be entitled to deduct and

withhold from the Merger Consideration otherwise payable pursuant to this

Agreement to any holder of Company Common Stock immediately prior to the Merger

such amounts as Parent is required to deduct and withhold with respect to such

Merger Consideration under the Code, or any provision of state, local or foreign

tax law. To the extent that amounts are so withheld by Parent, such withheld

amounts will be treated for all purposes as having been paid to the holder of

the shares in respect of which such deduction and withholding was made.



            (e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Company

certificates have been lost, stolen or destroyed, Parent will issue in exchange

for such lost, stolen or destroyed certificates, upon the making of an affidavit

of that fact by the holder thereof, such number of shares of Parent Common Stock

that such holder is entitled to receive in the Merger, less the shares being

escrowed, plus any cash in lieu of fractional shares all in accordance with this

Article II; provided, however, that Parent may, in its sole discretion and as a

condition precedent thereof, require the owner of such lost, stolen or destroyed

certificates to deliver a bond in such sum as Parent may reasonably direct as

indemnity against any claim that may be made against Parent with respect to the

certificates alleged to have been lost, stolen or destroyed.



        2.4 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer

books of the Company will be closed, and there will be no further registration

of transfers of Company Common Stock thereafter on the records of the Company.



        2.5 TAX AND ACCOUNTING CONSEQUENCES. For federal income tax purposes, it

is intended by the parties that the Merger qualify as a reorganization within

the meaning of Section 368(a) of the Code. The parties hereby adopt this

Agreement as a "plan of reor-







                                       8

<PAGE>   9



ganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the

United States Treasury Regulations (the "Treasury Regulations"). For accounting

purposes, it is intended by the parties that the Merger will be accounted for as

a purchase.



                                   ARTICLE III



                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY



        Except as the Company Disclosure Schedule, delivered by the Company and

acknowledged by Parent at least 24 hours prior to the execution of this

Agreement, specifically qualifies any of the following representations and

warranties (in which case the specified representation and warranty, but no

other representation or warranty, will be deemed made subject to such

qualification), the Company hereby represents and warrants to Parent and Merger

Sub that:



        3.1 ORGANIZATION AND GOOD STANDING. The Company is duly organized,

validly existing and in good standing under the laws of the State of California,

with full power and authority to own, operate and lease its properties, and to

carry on its business as that business is being conducted. The Company has full

power and authority to perform all its obligations under the Contracts (as

defined in Section 3.16). The Company is duly qualified to do business and is in

good standing in each jurisdiction in which the nature of the business conducted

or to be conducted or the assets owned or leased or to be owned or leased by it

requires such qualification, except where the failure to so qualify would not

have a material adverse effect on the financial condition, results of

operations, operations or prospects of the Company. Part 3.1 of the Company

Disclosure Schedule lists each jurisdiction in which the Company is or has filed

to be qualified to conduct business and jurisdictions in which the Company pays

income, sales or other taxes.



        3.2 SUBSIDIARIES; OWNERSHIP INTERESTS. The Company has no subsidiaries

(that is, corporations or other entities in which it has an equity interest or

over which it is in a position to exercise control, directly or indirectly) and

is not a party to any joint venture, partnership, trade association or other

similar association or arrangement. The Company has no right or obligation to

acquire any such equity interest or position or become such a party.



        3.3 AUTHORIZATION. The Company has full right, power and authority to

execute and deliver this Agreement and the other agreements to be entered into

by the Company in connection with the consummation of this Agreement and to

consummate the transactions contemplated hereby and thereby. The execution and

delivery by the Company of this Agreement and such other agreements and the

consummation of the transactions contemplated hereby and thereby have been duly

and validly authorized by the Company's Board of Directors. Except for

shareholder approval of the Merger, no other corporate or other proceedings on

the part of the Company are necessary to authorize this Agreement and such other

agreements and the transactions contemplated hereby and thereby. This







                                       9

<PAGE>   10



Agreement has been duly and validly executed and delivered by the Company and

constitutes a legal, valid and binding agreement of the Company, enforceable

against the Company in accordance with its terms, and, when executed and

delivered by the Company pursuant to the terms of this Agreement, each such

other agreement will be duly and validly executed and delivered by the Company

and will constitute a legal, valid and binding agreement of the Company,

enforceable against the Company in accordance with its terms, except in each

case as such enforceability may be limited by bankruptcy, insolvency,

reorganization, moratorium or other similar laws affecting the rights of

creditors generally or by general equitable principles. Except as identified in

Part 3.3 of the Company Disclosure Schedule, no filing with, and no permit,

authorization, consent or approval of any public body or authority is necessary

for the consummation by the Company of the transactions contemplated by this

Agreement or any of such other agreements or to preserve the benefits and rights

that the Company has now or will have at the Closing.



        3.4 CAPITALIZATION.



            (a) The authorized capital stock of the Company consists of (i)

20,000,000 shares of common stock, of which 1,497,160 shares are issued and

outstanding and held of record by the persons and in the amounts listed in Part

3.4(a) of the Company Disclosure Schedule; and (ii) 10,000,000 shares of

preferred stock, of which 3,500,000 shares are issued and outstanding and held

of record by James F. Kramer. The parties acknowledge that, immediately prior to

the Effective Time, Mr. Kramer will convert all of his shares of preferred stock

into common stock on a one-to-one basis. There are, and at the Closing there

will be, no other shares of capital stock of the Company outstanding, except for

shares of common stock issued on the conversion of all of the currently

outstanding shares of preferred stock or on the exercise of the currently

outstanding Company Stock Options, after the date of this Agreement. There is no

other class or type of shares of capital stock, equity interests or securities

of or in the Company authorized for issuance or outstanding. All of the

outstanding shares of capital stock of the Company are duly authorized and

validly issued, fully paid, nonassessable and free of preemptive rights.



            (b) The Company has reserved an aggregate of 700,000 shares of

common stock for issuance upon the exercise of options, of which options

covering 368,000 shares of common stock (i.e., the Company Stock Options) have

been granted under the Company Stock Option Plan. Each outstanding Company Stock

Option has been duly authorized by the Company's Board of Directors; and the

Company Stock Option Plan has been duly approved and adopted by the Company's

Board of Directors and shareholders. True and complete copies of the Company

Stock Option Plan, and of the forms of all agreements and instruments relating

to or issued thereunder, have been provided to Parent. Such Company Stock Option

Plan, agreements, instruments and forms have not been amended, modified or

supplemented; and there are no agreements or





                                       10

<PAGE>   11



commitments (whether written or oral) to amend, modify or supplement the Company

Stock Option Plan or any such agreements, instruments or forms. Part 3.4(b) of

the Company Disclosure Schedule contains a true and complete list, as to each

outstanding Company Stock Option, of the name of each holder of such Company

Stock Option, the number of shares subject to such Company Stock Option, the

exercise price per share of such Company Stock Option, the number of shares as

to which such Company Stock Option is now exercisable and the times when and

amounts as to which such Company Stock Option will become exercisable. Except as

set forth in Part 3.4(b) of the Company Disclosure Schedule, there are no

outstanding options, warrants, rights, agreements, convertible securities or

other commitments (contingent or otherwise) pursuant to which the Company is or

may become obligated to issue or sell any shares of capital stock, equity

interests or other securities.



            (c) Except as described in Part 3.4(c) of the Company Disclosure

Schedule, none of the outstanding shares of Company Common Stock or Company

Preferred Stock or the Company Stock Options was issued or granted in violation

of the federal securities laws or the securities or blue sky laws of any other

applicable jurisdiction.



        3.5 NO BREACH OR VIOLATION. None of the execution and delivery by the

Company of this Agreement or any of the other agreements to be entered into by

the Company in connection with the consummation of this Agreement, or the

consummation of the transactions contemplated hereby and thereby, will (i)

violate or conflict with any provision of the Company's Articles of

Incorporation or Bylaws; (ii) except as set forth in Part 3.5 of the Company

Disclosure Schedule, conflict with, or result in a violation or breach of, or

constitute a default under, require any notice under, or create any rights of

termination, cancellation or acceleration in any Person (as defined in Section

11.1(d)), require the consent or approval of any Person, or, in the absence of

the consent of any Person to the change of ownership and control of the Company

contemplated by this Agreement, result in the loss of any rights or benefits

either automatically or at the election of any Person or result in the creation

of any lien or encumbrance upon any of the Company's securities or assets

pursuant to the terms of any contract, indenture, mortgage, lease, agreement,

instrument, commitment or other arrangement to which the Company is a party or

by which it or any of its securities or assets is bound; (iii) violate any

judgment, order, permit, injunction, writ, decree or award of any court or any

regulatory or governmental authority against or binding upon the Company or any

of its securities or assets; or (iv) constitute a material violation by the

Company of, or either automatically or at the election of any Person result in

the material loss of any rights or benefits under, any statute, law, rule,

ordinance or regulation of any regulatory or governmental authority.



        3.6 FINANCIAL STATEMENTS; ABSENCE OF LIABILITIES. The Company has

attached to Part 3.6 of the Company Disclosure Schedule complete and accurate

copies of the





                                       11

<PAGE>   12



Company's compiled balance sheets as at December 31, 1997, 1998 and 1999, and

its internally prepared balance sheet as at June 30 2000 (collectively, the

"Balance Sheets"), and its related compiled statements of operations,

shareholders' equity and cash flows for the three years ended December 31, 1999,

and its related internally prepared statements of operations, shareholders'

equity and cash flows for the six months ended June 30, 2000 (collectively, the

"Company Financial Statements"). The Company Financial Statements (i) have been

prepared from the books and records of the Company substantially in accordance

with generally accepted accounting principles applied on a basis consistent with

prior periods except as set forth in Part 3.6 of the Company Disclosure

Schedule, and (ii) fairly present the consolidated results of operations, cash

flows and financial condition of the Company for and as of the dates and periods

indicated. Except as set forth in Part 3.6 of the Company Disclosure Schedule,

the Company has and at the Closing will have no liabilities or obligations,

whether contingent or absolute, direct or indirect, matured or unmatured,

asserted or unasserted, known or unknown, which are not shown or provided for on

the Balance Sheet or the notes thereto, except for those liabilities and

obligations which have arisen or will arise in the Ordinary Course of Business

(as defined in Section 11.1(c)) since June 30, 2000 (the "Balance Sheet Date")

and which are not individually or in the aggregate material in amount. There is

no basis for the assertion of any such liabilities or obligations. Except as set

forth in Part 3.6 of the Company Disclosure Schedule, the Company did not have

at the Balance Sheet Date and will not have at the Closing Date any indebtedness

for borrowed money to any bank, financial institution or other Person for any

money loaned or advanced, letters of credit issued, assets purchased or leased

under leases required by generally accepted accounting principles to be

capitalized, or any forbearance, whether or not represented by notes, credit

agreements or other instruments. Except as set forth in Part 3.6 of the Company

Disclosure Schedule, the Company has not booked any sales, and the revenues

shown on the Company Financial Statements do not include any sales, that are

subject to a right of return or were made on consignment.



        3.7 ABSENCE OF CERTAIN CHANGES. Except as set forth in Part 3.7 of the

Company Disclosure Schedule, since the Balance Sheet Date, (i) there has not

been any change in the condition (financial or otherwise), net worth, assets,

liabilities, business, properties, prospects or results of operations of the

Company (other than changes made or incurred in the Ordinary Course of

Business); and (ii) the Company has not:



            (a) Incurred any obligation or liability or entered into, and the

Company or its assets or securities have not become bound by, any agreement,

contract, lease or license or series of related agreements, contracts, leases or

licenses (except for this Agreement) other than in the Ordinary Course of

Business and involving obligations and liabilities not in excess of $10,000

individually or $50,000 in the aggregate, not including open purchase orders for

inventory placed in the Ordinary Course of Business;





                                       12

<PAGE>   13



            (b) Discharged or satisfied any lien or other encumbrance, paid any

liability or obligation whether fixed or contingent (except in the Ordinary

Course of Business or as required by the terms hereof) or accelerated,

terminated, modified or canceled any agreement, contract, lease or license;



            (c) Mortgaged, pledged or subjected to any lien or other encumbrance

any of its assets;



            (d) Sold, assigned, transferred, leased or otherwise disposed of or

agreed to dispose of any of its assets (except for sales of inventories in the

Ordinary Course of Business);



            (e) Waived or released any material rights;



            (f) Made any capital expenditure or improvement in excess of $10,000

individually, or $50,000 in the aggregate, or entered into any commitment

therefor;



            (g) Suffered any damage, destruction or loss (whether or not covered

by insurance) adversely affecting its assets or business;



            (h) Paid or agreed to pay any bonuses or make or agree to make any

increase in the rate of wages, salaries, compensation or other remuneration of

any of its directors, officers, employees consultants or agents;



            (i) Paid or agreed to pay any pension, retirement allowance or other

employee benefit not required by any existing plan, agreement or arrangement to

any of its directors, officers or employees, whether past or present; or



            (j) Declared or paid any dividends or made any distributions, either

in cash or in kind, repurchased any of its shares of capital stock, equity

interests or securities or made any other payment to or on behalf of any direct

or indirect owner of any shares of capital stock, equity interests or

securities.



        3.8 TAX MATTERS.



            (a) For purposes of this Agreement:



                (i) "Tax" or, collectively, "Taxes" means (A) any federal,

foreign, state and local taxes, assessments, duties and other similar

governmental charges and impositions properly includable in charges, accruals or

reserves for "taxes" under generally accepted accounting principles, including

customs duties, taxes based upon or measured by gross receipts, income, profits,

sales, use and occupation, and value added, ad valorem, transfer, franchise,

withholding (whether as a withholding agent or direct obligee), payroll,

recapture, employment, excise and property taxes, together with all interest,

penalties and additions imposed with respect to such amounts; and (B) any





                                       13

<PAGE>   14



liability for the payment of any amounts of the type described in clause (A) as

a result of being a member of an affiliated, consolidated, combined or unitary

group for any period;



                (ii) "Return" means any federal, foreign, state and local

return, estimate, information statement or report relating to any and all Taxes,

including any amendments of any previously filed return filed or required to be

filed with a Tax Agency, as defined below; and



                (iii) "Tax Agency" means the United States Internal Revenue

Service (the "IRS") or any other federal, foreign, state or local taxing

authority.



            (b) The Company has filed all income Tax Returns required to be

filed by it in a timely manner and has paid all Taxes shown to be due on such

Tax Returns, and all such Tax Returns are accurate and correct in all respects.

No action or proceeding for the assessment or collection of any Taxes is pending

against the Company, and no notice of any claim for Taxes, whether pending or

Threatened, has been received; no deficiency, assessment or other claim for

Taxes has been asserted or made against the Company that has not been fully paid

or finally settled; and no issue has been raised by any Tax Agency in connection

with an audit or examination. No federal, state or foreign income Tax Returns of

the Company have been or are being audited or examined, and there are no

outstanding agreements or waivers extending the applicable statutory periods of

limitation for such Taxes for any period.



            (c) All Taxes that the Company has been required to collect or to

withhold have been duly withheld or collected and, to the extent required, have

been paid to the proper taxing authority.



            (d) The Company is not and has not ever been a party to any Tax

allocation or sharing agreement, and has granted no outstanding power of

attorney regarding Taxes.



            (e) None of the assets of the Company constitutes tax-exempt bond

financed property or tax-exempt use property within the meaning of Section 168

of the Code. The Company is not a party to any "safe harbor lease" that is

subject to the provisions of Section 168(f)(8) of the Code as in effect prior to

the Tax Reform Act of 1986, or to any "long term contract" within the meaning of

Section 460 of the Code.



            (f) The Company is not a "consenting corporation" within the meaning

of Section 341(f)(1) of the Code, or comparable provisions of any state

statutes, and none of the assets of the Company are subject to an election under

Section 341(f) of the Code or comparable provisions of any state statutes.



            (g) The Company is not a party to any joint venture, partnership or

other arrangement that is treated as a partnership for federal income Tax

purposes.





                                       14

<PAGE>   15



            (h) There are no accounting method changes of the Company that could

give rise to an adjustment under Section 481 of the Code for periods after the

Closing Date.



            (i) The Company has reasonable authority for the treatment of, or

has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its

federal income Tax Returns, all positions taken therein that could give rise to

a substantial understatement of federal income Tax within the meaning of Section

6662(d) of the Code.



            (j) The Company has not been a member of an affiliated group filing

a consolidated federal income Tax return and does not have any liability for the

Taxes of another person (i) under Section 1.1502-6 of the Treasury Regulations

(or any similar provision of state, local or foreign law), (ii) as a transferee

or successor, (iii) by contract or (iv) otherwise.



            (k) The Company (i) has not agreed to and is not required to make

any adjustment pursuant to Section 481(a) of the Code and has no Knowledge (as

defined in Section 11.1) that the IRS has proposed in writing any such

adjustment or change in accounting method with respect to the Company; and (ii)

does not have any application pending with the IRS or any other Tax Agency

requesting permission for any change in accounting method.



            (l) The Company has no income reportable for a period ending after

the Closing Date but attributable to a transaction (e.g., an installment sale)

occurring in a period ending on or prior to the Closing Date which resulted in a

deferred reporting of income from such transaction.



            (m) Part 3.8 of the Company Disclosure Schedule contains a complete

and accurate list of all Tax Returns filed with respect to the Company and

indicates for which jurisdictions Tax Returns have been filed on the basis of a

consolidated or unitary group, the most recent Tax Return for each relevant

jurisdiction for which an audit has been completed or the statute of limitations

has lapsed, and all Tax Returns that currently are the subject of audit.



            (n) The Company is not, and has not been at any time, a "United

States real property holding corporation" within the meaning of Section

897(c)(2) of the Code.

Home        Intelligence        Services        Subscriptions        News        About Us

Contact Us       Terms of Use       Resend Documents       Shopping Cart

Copyright © 2008 The Consus Group LLC