10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
or
o	TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT

For the Transition Period from              to            

Commission file number 1-13463

BIO-KEY INTERNATIONAL, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

DELAWARE	41-1741861
(State or Other Jurisdiction of Incorporation of Organization)	(IRS Employer Identification Number)

3349 HIGHWAY 138, BUILDING D, SUITE B, WALL, NJ  07719

(Address of Principal Executive Offices)

(732) 359-1100

(Registrant’s Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act)

Yes  o  No  x

Number of shares of Common Stock outstanding as of November 10, 2008 were 66,166,155, par value $.0001 per share.

BIO-KEY INTERNATIONAL, INC.

INDEX

PART I. FINANCIAL INFORMATION
	Item 1	—	Condensed Consolidated Financial Statements	3
			Balance sheets as of September 30, 2008 (unaudited) and December 31, 2007	4
			Statements of operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)	5
			Statements of cash flows for the nine months ended September 30, 2008 and 2007 (unaudited)	6
			Notes to condensed consolidated financial statements	8
	Item 2	—	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	24
	Item 4	—	Controls and Procedures	37
PART II. OTHER INFORMATION
	Item 6	—	Exhibits	37

2

PART I
FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

3

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Cash and cash equivalents	$	1,117,297		$	964,774
Restricted cash	40,500			153,094
Accounts receivable, net of allowance for doubtful accounts of $82,400 at September 30, 2008 and $113,771 December 31, 2007	1,956,252			2,129,797
Costs and earnings in excess of billings on uncompleted contracts	105,128			233,805
Inventory	16,887			4,879
Investments	1,109			—
Prepaid expenses	71,758			119,068
Total current assets	3,308,931			3,605,417
Equipment and leasehold improvements, net	88,095			177,282
Deposits and other assets	7,812			487,815
Intangible assets—less accumulated amortization	767,741			1,324,269
Goodwill	7,836,986			7,836,986
Total non-current assets	8,700,634			9,826,352
TOTAL ASSETS	$	12,009,565		$	13,431,769
LIABILITIES
Accounts payable	$	250,663		$	1,162,690
Accrued liabilities	1,273,235			3,401,749
Notes payable	1,854,383			—
Deferred rent	1,635			367,986
Deferred revenue	5,089,908			4,468,748
Total current liabilities	8,469,824			9,401,173
Warrants	41,146			64,520
Redeemable preferred stock derivatives	2,244			41,295
Deferred rent	2,878			—
Deferred revenue	11,751			34,518
Total non-current liabilities	58,019			140,333
TOTAL LIABILITIES	8,527,843			9,541,506
Commitments and contingencies
Series B redeemable convertible preferred stock: authorized, 1,000,000 shares (liquidation preference of $1 per share); issued and outstanding 970,612 shares of $.0001 par value at September 30, 2008 and December 31, 2007	976,605			881,340
Series C redeemable convertible preferred stock: authorized, 600,000 shares (liquidation preference of $10 per share); issued and outstanding 592,032 shares of $.0001 par value at September 30, 2008 and December 31, 2007	6,281,084			5,776,231
	7,257,689			6,657,571
STOCKHOLDERS’ DEFICIT:
Series A convertible preferred stock: authorized, 100,000 shares (liquidation preference of $100 per share); issued and outstanding 30,557 shares of $.0001 par value, at September 30, 2008 and December 31, 2007	3			3
Common stock — authorized, 170,000,000 shares; issued and outstanding; 65,853,492 and 61,153,202 of $.0001 par value at September 30, 2008 and December 31, 2007, respectively	6,585			6,115
Additional paid-in capital	51,908,739			52,126,595
Accumulated other comprehensive income	1,109			—
Accumulated deficit	(55,692,403		)	(54,900,021		)
TOTAL STOCKHOLDERS’ DEFICIT	(3,775,967		)	(2,767,308		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	12,009,565		$	13,431,769

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

4

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended  September 30,						Nine months ended  September 30,
	2008			2007			2008			2007
Revenues
Services	$	1,838,549		$	1,516,822		$	5,384,163		$	5,089,465
License fees and other	1,044,182			651,269			3,618,939			2,256,726
	2,882,731			2,168,091			9,003,102			7,346,191
Costs and other expenses
Cost of services	300,480			359,963			936,813			1,207,433
Cost of license fees and other	106,763			101,648			333,089			196,251
	407,243			461,611			1,269,902			1,403,684
Gross Profit	2,475,488			1,706,480			7,733,200			5,942,507
Operating Expenses
Selling, general and administrative	1,584,630			1,935,670			5,069,028			6,699,446
Research, development and engineering	1,082,399			1,220,257			3,493,647			3,897,197
	2,667,029			3,155,927			8,562,675			10,596,643
Operating loss	(191,541		)	(1,449,447		)	(829,475		)	(4,654,136		)
Other income (deductions)
Derivative and warrant fair value adjustments	73,600			262,539			62,426			932,991
Interest income	42			4,725			1,339			6,057
Interest expense	(44,960		)	(19,440		)	(62,966		)	(818,757		)
Investment income	118,631			—			118,631			—
Loss on extinguishment of debt	—			—			—			(403,940		)
Other	(740		)	11,008			(16,882		)	(12,896		)
	146,573			258,832			102,548			(296,545		)
Loss from continuing operations	(44,968		)	(1,190,615		)	(726,927		)	(4,950,681		)
Income (loss) from discontinued operations	—			—			(65,454		)	440,105
Gain on disposal of discontinued operations, net of expected tax of $0.	—			1,147			—			4,072,006
Net Income (loss)	$	(44,968	)	$	(1,189,468	)	$	(792,381	)	$	(438,570	)
Basic and Diluted Earnings per Common Share:
Loss from continuing operations	$	(0.01	)	$	(0.03	)	$	(0.03	)	$	(0.11	)
Income (loss) from discontinued operations	0.00			0.00			0.00			0.01
Gain on disposal of discontinued operations	0.00			0.00			0.00			0.07
Net loss	$	(0.01	)	$	(0.03	)	$	(0.03	)	$	(0.03	)
Weighted Average Shares Outstanding:
Basic	64,913,843			59,413,729			63,299,532			58,048,664
Diluted	64,913,843			59,413,729			63,299,532			58,048,664

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

5

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss)	$	(792,381	)	$	(438,570	)
Less:
(Income) loss from discontinued operations	65,454			(440,105		)
Gain on disposal of discontinued operations	—			(4,072,006		)
Loss from continuing operations	(726,927		)	(4,950,681		)
Adjustments to reconcile net loss to cash used in operating activities:
Derivative and warrant fair value adjustments	(62,426		)	(932,991		)
Loss on extinguishment of debt	—			403,003
Depreciation	96,694			193,600
Amortization
Intangible assets	556,528			571,847
Deferred financing costs	—			83,871
Discounts on convertible debt related to warrants and beneficial conversion features	—			360,245
Allowance for doubtful receivables	(31,371		)	(28,756		)
Deferred rent	(363,473		)	(369,248		)
Fair market value adjustment on equity issuance and warrant modification	—			124,999
Share-based compensation	382,733			534,157
Change in assets and liabilities:
Accounts receivable trade	204,916			1,089,681
Costs and earnings in excess of billings on uncompleted contracts	128,677			475,666
Inventory	(12,008		)	4,150
Prepaid expenses and other	47,310			(14,059		)
Accounts payable	(912,027		)	(62,613		)
Billings in excess of costs and earnings on uncompleted contracts	—			(11,429		)
Accrued liabilities	(2,128,513		)	(603,994		)
Notes Payable	1,854,383			—
Deferred revenue	598,393			290,768
Net cash used for continuing operations	(367,111		)	(2,841,784		)
Net cash provided by (used for) discontinued operations	(15,454		)	576,383
Net cash used for operating activities	(382,565		)	(2,265,401		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(18,039		)	(53,296		)
Deposits	480,003			312,539
Proceeds from the sale of the Fire business	—			7,000,000
Transfer of funds from (to) restricted cash	112,594			(154,712		)
Proceeds from sale of Assets	10,530			—
Patent costs	—			53,357
Net cash provided by continuing operations	585,088			7,157,888
Net cash used for discontinued operations	(50,000		)	(7,615		)
Net cash provided by investing activities	535,088			7,150,273
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of long term obligations	—			(4,661,958		)
Net cash used for continuing operations	—			(4,661,958		)
Net cash used for discontinued operations	—			—
Net cash used for financing activities	—			(4,661,958		)
NET INCREASE IN CASH AND CASH EQUIVALENTS	152,523			222,914
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	964,774			627,167
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,117,297		$	850,081

6

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

	Nine Months Ended September 30,
	2008	2007
Cash paid for:
Interest	42,791	370,090
Noncash Investing and Financing Activities:
Conversion of convertible notes and related obligations, net of discount, and accrued interest into common stock	—	772,764
Issuance of common stock through conversion of principal and dividends outstanding on preferred stock	656,096	978,975

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

7

BIO-KEY INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008 (Unaudited)

1.BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements include the accounts of BIO-key International, Inc. and its wholly owned subsidiary (collectively, the “Company”) and are stated in conformity with accounting principles generally accepted in the United States of America, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. Significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all necessary adjustments, consisting only of those of a recurring nature, and disclosures to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The balance sheet at December 31, 2007 was derived from the audited financial statements, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 (the “Form 10-KSB”).

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which is effective for calendar year companies on January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The adoption of SFAS 157 had no impact on the Company’s financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (SFAS 159), which is effective for calendar year companies on January 1, 2008. This Statement allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. The adoption of SFAS 159 had no impact on the Company’s financial condition and results of operations.

In December 2007, the SEC issued SAB No. 110.  SAB 110 allows for the continued use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS 123 (revised 2004).  Originally the SEC staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007.  Accordingly, the SEC staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.  The Company will continue to use the simplified method for determining the value of options granted as allowed by SAB 110.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)) which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.  SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The

8

provisions of SFAS No. 141(R) are applicable to business combinations consummated on or after December 15, 2008 with early adoption prohibited.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”  (SFAS No. 160) which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary for the deconsolidation of a subsidiary.  SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim statements within those fiscal years. The Company does not currently have any noncontrolling interests.

In March 2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” (SFAS No.161) which amends and expands the disclosure requirements related to derivative instruments and hedging activities. The Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The provisions of SFAS 161 are effective for the fiscal year beginning January 1, 2009. The company will comply with the disclosure requirements of this statement if it utilizes derivative instruments or engages in hedging activities upon its effectiveness.

Reclassifications

Certain amounts in the 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation. These reclassifications had no effect on the previously reported net loss or stockholders’ deficit.

2.LIQUIDITY AND CAPITAL RESOURCE MATTERS

We have only recently begun to generate significant revenues and have incurred significant losses to date, and at September 30, 2008, we had an accumulated deficit of approximately $56 million. In addition, broad commercial acceptance of our technology is critical to the Company’s success and ability to generate future revenues.

If the Company is unable to generate sufficient revenue to meet our goals, we will need to obtain additional third-party financing to (i) conduct the sales, marketing and technical support necessary to execute our plan to substantially grow operations, increase revenue and serve a significant customer base; and (ii) provide working capital. No assurance can be given that any form of additional financing will be available on terms acceptable to the Company, that adequate financing will be obtained by the Company in order to meet its needs, or that such financing would not be dilutive to existing shareholders

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern, and assumes continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The matters described in the preceding paragraphs raise substantial doubt about the Company’s ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon the Company’s ability to meet its financing requirements on a continuing basis and become profitable in its future operations. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

3.DISCONTINUED OPERATIONS

On May 22, 2007, the Company and ZOLL Data Systems, Inc. (“ZOLL”), a subsidiary of ZOLL Medical Corporation, entered into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which

9

ZOLL acquired substantially all of the assets related to the Company’s Fire/EMS Services division (the “Fire Segment” or “Fire”).

At the closing of the sale, the Company received approximately $1.8 million in cash, which represented the purchase price of $7 million, less closing adjustments of approximately $4.3 million, which was paid to the Senior Noteholder (see Note 9), approximately $450,000, which was paid to the leaseholder of the Company’s premises, $400,000, which was placed in escrow pursuant to the Purchase Agreement, and approximately $40,000 credited to Zoll on the assumption of certain liabilities.

During the quarter ended September 30, 2007, $250,000 of the escrow balance was released to ZOLL. The remaining escrow balance was remitted to the Company May 6, 2008.  From the remaining balance, $50,000 was paid as a settlement of a customer claim associated with the discontinued Fire business, and $15,454 was paid as related professional fees to settle the claim which resulted in the $65,454 loss.

Prior to the sale, Fire had been reported as a separate segment. The Company sold its Fire operating segment to better focus on its core lines of business. The Fire business has been reported as a discontinued operation in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and all periods presented have been recast accordingly to reflect these operations as discontinued.

Revenues and net income (loss) for the Fire Segment for the three and nine month periods ended September 30, 2008 and 2007 were as follows:

	Three Months Ended  September 30,				Nine Months Ended  September 30,
	2008		2007		2008			2007
Revenues	$	—	$	—	$	—		$	1,546,746
Net income (loss)	—		—		(65,454		)	440,105

4.SHARE BASED COMPENSATION

The Company accounts for share based compensation in accordance with the provisions of SFAS 123R, which requires measurement of compensation cost for all stock awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The majority of our share-based compensation arrangements vest over either a three or four year vesting schedule. The Company expenses its share-based compensation under the ratable method, which treats each vesting tranche as if it were an individual grant. The fair value of stock options is determined using the Black-Scholes valuation model, and requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected option term”), the estimated volatility of our common stock price over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Changes in these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized as an expense in the consolidated statements of operations. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as expense over the service period, net of estimated forfeitures (the number of individuals that will ultimately not complete their vesting requirements). The estimation of stock awards that will ultimately vest requires significant judgment. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

The compensation expense recognized under SFAS 123R increased the Company’s loss from continuing operations by $50,532 and $145,173 with no effect per share (basic and diluted) for the three months ended September 30, 2008 and 2007 respectively, and $382,733 and $534,157 with a $0.01 effect per share (basic and diluted), for the nine months ended September 30, 2008 and 2007 respectively.

10

The following table presents share-based compensation expenses for continuing operations included in the Company’s unaudited condensed interim consolidated statements of operations:

	Three Months Ended  September 30,		Three Months Ended  September 30,
	2008		2007
Cost of services	$	1,998	$	4,470
Selling, general and administrative	26,782		71,683
Research, development and engineering	21,752		69,020
	$	50,532	$	145,173

	Nine Months Ended  September 30,		Nine Months Ended  September 30,
	2008		2007
Cost of services	$	15,637	$	13,948
Selling, general and administrative	259,716		369,881
Research, development and engineering	107,380		150,328
	$	382,733	$	534,157

Valuation Assumptions for Stock Options

For the three months ended September 30, 2008 and 2007, 195,000 and 137,000 stock options were granted, respectively. For the nine months ended September 30, 2008 and 2007, 759,272 and 290,000 stock options were granted, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended  September 30,
	2008		2007
Risk free interest rate	3.09	%	4.59	%
Expected life of options (in years)	4.5		4.5
Expected dividends	0	%	0	%
Volatility of stock price	87	%	88	%

	Nine Months Ended  September 30,
	2008		2007
Risk free interest rate	2.95-3.72	%	4.58-4.68	%
Expected life of options (in years)	4.5		4.5
Expected dividends	0	%	0	%
Volatility of stock price	87-88	%	86-88	%

The stock volatility for each grant is determined based on the review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term. The expected term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

11

EQUITY COMPENSATION PLAN INFORMATION

1996 Stock Option Plan

During 1996, the Board of Directors and stockholders of the Company adopted the 1996 Stock Option Plan (the “1996 Plan”). Under the 1996 Plan, 750,000 shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 100% of fair market value for incentive stock options and 50% for all others. The term of stock options granted may not exceed ten years. Options issued under the 1996 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The 1996 Plan expired in May 2005.

1999 Stock Option Plan

During 1999, the Board of Directors of the Company adopted the 1999 Stock Option Plan (the “1999 Plan”). The 1999 Plan was not presented to stockholders for approval and thus incentive stock options are not available under the plan. Under the 1999 Plan, 2,000,000 shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 85% of fair market value. The term of nonstatutory stock options granted may not exceed ten years. Options issued under the 1999 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The 1999 Plan expires in August 2009.

2004 Stock Option Plan

On October 12, 2004, the Board of Directors of the Company approved the 2004 Stock Option Plan (the “2004 Plan”). The 2004 Plan has not yet been presented to stockholders for approval and thus incentive stock options are not available under this plan. Under the terms of the 2004 Plan, 4,000,000 shares of common stock are reserved for issuance to employees, officers, directors, and consultants of the Company at exercise prices which may not be below 85% of fair market value. The term of stock options granted may not exceed ten years. Options issued under the 2004 Plan vest pursuant to the terms of stock option agreements with the recipients. In the event of a change in control, as defined, all options outstanding vest immediately. The 2004 Plan expires in October 2014.

Non-Plan Stock Options

Periodically, the Company has granted options outside of the 1996, 1999, and 2004 Plans to various employees and consultants. In the event of change in control, as defined, certain of the non-plan options outstanding vest immediately.

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 2008:

12

	Number of Options								Weighted  average  exercise		Weighted  average  remaining  life	Aggregate  intrinsic
	1996 Plan	1999 Plan	2004 Plan		Non Plan		Total		price		(in years)	value
Outstanding, as of December 31, 2007	80,000	805,000	2,221,415		3,943,000		7,049,415		$	0.85
Granted	—	—	759,272		—		759,272		0.13
Exercised	—	—	—		—		—		—
Forfeited	—	—	(31,002	)	—		(31,002	)	0.51
Expired	—	—	(111,744	)	(48,000	)	(159,744	)	2.55
Outstanding, as of September 30, 2008	80,000	805,000	2,837,941		3,895,000		7,617,941		0.75		3.29	—
Vested or expected to vest at September 30, 2008.							7,323,569		0.76		3.16	—
Exercisable at September 30, 2008							6,759,902		0.80		2.98	—

The options outstanding and exercisable at September 30, 2008 were in the following exercise price ranges:

	Options Outstanding				Options Exercisable
Range of exercise prices	Number of  shares	Weighted  average  exercise  price		Weighted  average  remaining  life (in years)	Number  exercisable	Weighted  average  exercise  price
$ 0.11-0.21	826,272	$	0.13	6.56	299,603	$	0.12
0.22-0.40	871,000	0.33		1.20	837,330	0.33
0.41-0.68	2,086,000	0.56		2.66	1,788,300	0.55
0.69-1.11	2,163,169	0.90		3.91	2,163,169	0.90
1.12-1.62	1,671,500	1.30		2.73	1,671,500	1.30
$ 0.11-1.62	7,617,941				6,759,902

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.10 as of September 30, 2008, which would have been received by the option holders had all option holders exercised their options as of that date. There were no in-the-money options exercisable as of September 30, 2008.

The weighted average fair value of options, as determined under SFAS No.123R, granted during the three months ended September 30, 2008 and 2007 was $0.11 and $0.07 per share, respectively, and during the nine months ended September 30, 2008 and 2007 was $0.11 and $0.13 per share, respectively.

As of September 30, 2008 future compensation cost related to nonvested stock options is approximately $145,406 and will be recognized over an estimated weighted average period of approximately 1.12 years.

5.EARNINGS (LOSS) PER SHARE COMMON STOCK (“EPS”)

The Company’s basic EPS is calculated using net income (loss) available to common shareholders and the weighted-average number of shares outstanding during the reporting period. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes and preferred stock. For the three and nine months ended September 30, 2008 and 2007, diluted per share computations are not presented since this effect would be antidilutive.

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The reconciliation of the numerators of the basic and diluted EPS calculations was as follows for both of the following three and nine month periods ended September 30:

	Three Months ended  September 30,						Nine Months ended  September 30,
	2008			2007			2008			2007
Numerator:
Loss from continuing operations	$	(44,968	)	$	(1,190,615	)	$	(726,927	)	$	(4,950,681	)
Convertible preferred stock dividends and accretion	(474,358		)	(474,358		)	(1,416,145		)	(1,417,266		)
Loss available to common stockholders (basic EPS)	$	(519,326	)	$	(1,664,973	)	$	(2,143,072	)	$	(6,367,947	)
Weighted-average shares used to compute diluted EPS	64,913,843			59,413,729			63,299,532			58,048,664

The following table summarizes the potential weighted average shares of common stock that were excluded from the diluted per share calculation, because the effect of including these potential shares was antidilutive.

	Three Months Ended  September 30,		Nine Months Ended  September 30,
	2008	2007	2008	2007
Preferred Stock	33,155,440	33,155,440	33,155,440	26,287,737
Convertible Debt	—	—	—	4,543,057
Stock Options	—	961	—	19,361
Potentially dilutive securities	33,155,440	33,156,401	33,155,440	30,850,155

Items excluded from the diluted per share calculation because the exercise price was greater than the average market price of the common shares:

	Three Months Ended  September 30,		Nine Months Ended  September 30,
	2008	2007	2008	2007
Stock options	6,759,902	5,905,712	6,759,902	5,845,712
Warrants	10,566,375	10,566,375	10,566,375	10,566,375
Total	17,326,277	16,472,087	17,326,277	16,412,087

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6.EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consisted of the following:

	September 30,			December 31,
	2008			2007
Equipment	$	535,698		$	517,658
Furniture and fixtures	148,494			187,984
Software	136,355			136,355
Leasehold improvements	198,889			198,889
	1,019,436			1,040,886
Less accumulated depreciation and amortization	(931,341		)	(863,604		)
Total	$	88,095		$	177,282

7.GOODWILL AND OTHER INTANGIBLE ASSETS

The Company’s goodwill resulted from the acquisition of Public Safety Group, Inc. and certain assets and assumed liabilities of the Mobile Government Division of Aether Systems, Inc. in 2004. As provided by SFAS No. 142, the Company has elected to perform the annual assessment of the carrying value of all goodwill as of September 30^th of each year using a number of criteria, including the value of the overall enterprise. Impairment charges from existing operations or other acquisitions, if any, are reflected as an operating expense in the statement of operations.  As of September 30, 2008 goodwill totaled $7,836,986.

Other intangible assets as of September 30, 2008 consisted of the following:

	September 30, 2008							December 31, 2007
	Gross  Carrying  Amount		Accumulated  Amortization			Net Carrying  Amount		Gross  Carrying  Amount		Accumulated  Amortization			Net Carrying  Amount
Copyrighted software	$	1,181,429	$	(1,063,286	)	$	118,143	$	1,181,429	$	(886,071	)	$	295,358
Customer relationships	617,271		(493,817		)	123,454		617,271		(401,225		)	216,046
Trademarks	807,872		(684,278		)	123,594		807,872		(563,099		)	244,773
Developed technology	434,353		(347,482		)	86,871		434,353		(282,330		)	152,023
Marketing agreements	605,340		(544,807		)	60,533		605,340		(454,005		)	151,335
Patents and patents pending	298,059		(42,913		)	255,146		298,059		(33,325		)	264,734
Total	$	3,944,324	$	(3,176,583	)	$	767,741	$	3,944,324	$	(2,620,055	)	$	1,324,269

Aggregate amortization expense for the three months ended September 30, 2008 and 2007, was $187,815 and $203,818 respectively, and was $556,528 and $571,847 for the nine months ended September 30, 2008 and 2007 respectively.

8.INVESTMENTS

During 2005, BIO-key was issued shares in a private company, which specialized in providing security products and associated software. There was no cost to the investment for these shares, and because BIO-key had a minimal ownership interest in the company and was unable to exhibit any influence on the company’s management or board, BIO-key treated the investment on the cost basis as promulgated under APB 18, “Equity Method of Accounting for Investments in Common Stock.”

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In February 2008, the above mentioned private company consummated a reverse merger with a publicly traded US company. As a result of the merger, BIO-key’s investment was converted into shares of the public company. This change in circumstances enabled the fair value of the investment to be “readily determinable” under the provisions of FAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, BIO-key now classifies its investment as an “available-for-sale” security, and accounts for it at its market value as specified on a securities exchange.

Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive income, net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income to investment income. Realized gains and losses and other than temporary impairments on investments are reflected in the income statement in investment income or expense. Gains or losses are calculated primarily using the first-in, first-out method.

The following table summarizes our investment at September 30, 2008 and December 31, 2007. The investment is classified within current assets in the balance sheet. Fair value for publicly-traded available-for-sale investments is determined based upon quoted prices. Fair value is not readily available for privately-held investments.

	September 30, 2008				December 31, 2007
	Cost		Fair Value		Cost		Fair Value
Available-for-sale security	$	—	$	1,109	$	—	$	—
Balance as of September 30, 2008	$	—	$	1,109	$	—	$	—

Unrealized gain on the available-for-sale security was $1,109 at September 30, 2008.  Realized gain on the available-for-sale security was $118,631 at September 30, 2008.

9.CONVERTIBLE DEBT FINANCING / WARRANTS

Long-term obligations consisted of the following as of:

	September 30,		December 31,
	2008		2007
2004
FMV of warrants	$	1,885	$	11,663
2005
FMV of warrants	25,342		34,644
2006
FMV of warrants	13,919		18,213
Total	$	41,146	$	64,520

Senior Convertible Term Notes

2004 and 2005 Senior Notes

On September 29, 2004, the Company entered into a Securities Purchase Agreement (the “2004 Senior Purchase Agreement”) with Laurus Master Fund, Ltd. (“Laurus”) to issue secured convertible term notes in the aggregate principal amount of $5,050,000.  On June 8, 2005, we entered into a second Securities Purchase Agreement (the “2005 Senior Purchase Agreement”) with Laurus.

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On May 22, 2007, the Company used approximately $4,300,000 of the net cash proceeds received in connection with the sale of the Fire Segment (see Note 3) to repay in full its obligations to Laurus under the 2004 and 2005 Senior Notes.

The account balance shown represents the fair market value of warrants issued in conjunction with debt offerings undertaken from the 2004 to 2006 fiscal years. The Warrants are classified as liabilities and were valued as of September 30, 2008, using the Black Scholes Option Pricing model with the following assumptions: dividend yield of 0%; annual volatility of 91% to 108% and risk-free interest rate of 2.4% to 2.8%.

2004 and 2005 Senior Note Derivatives and Discounts

The 2004 and 2005 Senior Notes contained features that were considered embedded derivative financial instruments, such as: Principal’s conversion option, Monthly Payments Conversion Option, Interest Rate Adjustment provision, and the Default provision. These features were bifurcated and recorded on the Company’s balance sheet at their fair value.

Following the repayment of the 2004 and 2005 Senior Notes on May 22, 2007, the value of the embedded derivatives and amortized discounts related to the Notes were written off to Loss on Extinguishment of Debt.

10.ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

	September 30,		December 31,
	2008		2007
Contract costs not yet invoiced by vendors	$	118,805	$	2,185,610
Compensation	138,076		140,314
Compensated absences	387,488		367,731
Royalties	266,051		371,158
Interest	176,083		176,083
Other	186,732		160,853
Total	$	1,273,235	$	3,401,749

11.NOTES PAYABLE

On July 28, 2008, the Company entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with a vendor in order to resolve all matters relating to invoices totaling approximately $2,350,000 that the Company received in January 2008 for materials that had been delivered by the vendor, as a subcontractor on a long-term project for which the Company had served as the prime contractor.  Pursuant to the Settlement Agreement, the parties agreed to a payment schedule under which the Company will be required to satisfy this outstanding balance, plus interest at seven percent (7%) per annum on the unpaid portion of the balance, in full on or before June 1, 2009.  In return, the vendor agreed to forbear from exercising any of its rights and remedies against the Company with respect to these amounts so long as the Company remains in compliance with its obligations under of the Settlement Agreement.    As of September 30, 2008 the remaining balance due was $1,854,383.

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12.REDEEMABLE PREFERRED STOCK

Series B Convertible Preferred Stock

The Company issued 1,000,000 shares of redeemable Series B Convertible Preferred Stock on February 23, 2006, upon the conversion of certain convertible term notes. Each share of Series B Preferred Stock has an Original Issue Price of $1.00 per share. The holder has the option to redeem the shares of Series B Preferred Stock at any time for a number of shares of the Company’s common stock equal to the Original Issue Price plus accumulated and unpaid dividends divided by the fixed conversion price of $0.30 per share of Common. The conversion price is subject to adjustment if common stock is issued by the Company subsequent to the original issue date of the Series B Preferred Stock, except for other conversions, options, warrants, dividends paid in stock or pursuant to an acquisition by the Company, at a price less than the conversion price. Mandatory conversion of all Series B shares will be automatic if, for the 30 trading days prior to January 1, 2009, the average closing bid price for one share of common stock is at least $1.10. The shares shall be converted at the conversion price then in effect. If the average bid price for the 30 trading days prior to January 1, 2009 per common share is less than $1.10 the Company shall mandatorily redeem all remaining outstanding Series B Preferred Stock by paying cash equal to $1.00 per share with all accrued and unpaid dividends.  The Company may, at its election, redeem any or all of the remaining outstanding Series B shares in cash at a conversion price equal to $1.20 per share, together with all accrued and unpaid dividends upon giving 30 day notice. Holders of the Series B Preferred Stock are entitled to cumulative, prior and in preference to holders of common stock dividends equal to 15% per annum of the Original Purchase Price still outstanding, payable quarterly. In any liquidation of the Company, each share of Preferred Stock is entitled to a liquidation preference on a pari passu basis with the Series A and Series C Preferred Stock before any distribution may be made on the Company’s common stock.

As of September 30, 2008, 1,000,000 shares of Series B Preferred Stock were authorized, 970,612 of which were issued and outstanding, at a par value of $0.0001 and a liquidation preference of $1.00 with accumulated dividends in arrears of $37,207, which have been accreted to the principal balance of the Series B preferred stock.

The Preferred Stock contains features that are considered embedded derivative financial instruments:  Preferred Stock’s conversion option:  The Preferred Stock is convertible at the Holder’s option at any time at the fixed conversion price of $0.30 per share; Quarterly Dividends Conversion Option:  Holders have the option to convert the Stock’s quarterly dividend payment at a conversion price of the average 10 days closing price prior to the dividend record date.  These features have been bifurcated and recorded on the Company’s balance sheet at their fair value.

As of September 30, 2008 the derivatives were valued at $439.  Conversion related derivatives were valued using the Binomial Option Pricing Model with the following assumptions: dividend yield of 15%; annual volatility of 49%; and risk free annual interest rate of 0.92% as well as probability analysis related to trading volume restrictions.

An amount equal to the original value of the derivatives was recorded as a discount to the Preferred Stock.  The discount is being accreted to the principal balance of the Preferred Stock, using the effective interest method, over the expected term of the Preferred Stock.  At September 30, 2008, the unamortized discount on the Preferred Stock was $31,620.

Series C Convertible Preferred Stock

The Company issued 592,032 shares of redeemable Series C Convertible Preferred Stock on August 10, 2006, upon the exchange of certain convertible term notes. Each share of Series C Preferred Stock has an Original Issue Price of $10.00 per share. The holder has the option to redeem the shares of Series C Preferred Stock at any time for a number of shares of the Company’s common stock equal to the Original Issue Price plus accumulated and unpaid dividends divided by the fixed conversion price of $0.30 per share of Common Stock. The conversion price is subject to adjustment if common stock is issued by the Company subsequent to the original issue date of the Series C Preferred Stock, except for other conversions, options, warrants, dividends paid in stock or pursuant to an acquisition by the Company, at a price less than the conversion price. Mandatory conversion of all Series C shares will be automatic if, for the 30 trading days prior to January 1, 2009, the average closing bid price for one share of common stock is at least $1.20. The shares shall be converted at the conversion price then in effect. If the average bid price for the 30 trading days prior to January 1, 2009 per common share is less than $1.20 the Company shall

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mandatorily redeem all remaining outstanding Series C preferred stock by paying cash equal to $10.00 per share with all accrued and unpaid dividends.  The Company may, at its election, redeem any or all of the remaining outstanding Series C shares in cash at a conversion price equal to $12.00 per share, together with all accrued and unpaid dividends upon giving 30 day notice. Holders of the Series C preferred stock are entitled to cumulative, prior and in preference to holders of common stock dividends equal to 15% per annum of the Original Purchase Price still outstanding, payable quarterly. In any liquidation of the Company, each share of Preferred Stock is entitled to a liquidation preference on a pari passu basis with the Series A and Series B Preferred Stock before any distribution may be made on the Company’s common stock.

As of September 30, 2008, 600,000 Shares of Series C Preferred Stock were authorized, 592,032 of which were issued and outstanding, at a par value of $0.0001 and a liquidation preference of $10.00 with accumulated dividends in arrears of $482,220, which have been accreted to the principal balance of the Series C Preferred Stock.

The Preferred Stock contains features that are considered embedded derivative financial instruments:  Preferred Stock’s conversion option:  The Preferred Stock is convertible at the Holder’s option at any time at the fixed conversion price of $0.30 per share; Quarterly Dividends Conversion Option:  Holders have the option to convert the Stock’s quarterly dividend payment at a conversion price of the average 10 days closing price prior to the dividend record date.  These features have been bifurcated and recorded on the Company’s balance sheet as liabilities, at their fair value.

As of September 30, 2008 the derivatives were valued at $1,805.  Conversion related derivatives were valued using the Binomial Option Pricing Model with the following assumptions: dividend yield of 15%; annual volatility of 49%; and risk free annual interest rate of 0.92% as well as probability analysis related to trading volume restrictions.

An amount equal to the original value of the derivatives was recorded as a discount to the Preferred Stock.  The discount is being accreted to the principal balance of the Preferred Stock, using the effective interest method, over the expected term of the Preferred Stock.  At September 30, 2008, the unamortized discount on the Preferred Stock was $112,361.

Together with the above transaction, the terms of certain warrants held by the Company’s investment bankers and their associates were modified. The incremental value of the modification was calculated to be $110,453, and was allocated against the proceeds of the Series C Convertible Preferred Stock as a cost of financing, and is being accreted to the principal balance of the Preferred Stock, using the effective interest method, over the expected term of the term of the Preferred Stock.  At September 30, 2008, the net amount remaining to be accreted was $11,562.

13.STOCKHOLDERS EQUITY

Common Stock

The Company is authorized to issue 170,000,000 shares of common stock, $.0001 par value per share, of which 65,853,492 were outstanding as of September 30, 2008.

Holders of common stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of common stock have one vote for each share held of record and do not have cumulative voting rights.

Holders of common stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of common stock are not redeemable and have no preemptive or similar rights. All outstanding shares of common stock are fully paid and nonassessable.

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During the three months and the nine months ended September 30, 2008, preferred stockholders converted accumulated dividends of $313,747 into 1,940,109 shares and accumulated dividends of $656,096 into 4,700,290 shares of the Company’s common stock respectively.

Series A Convertible Preferred Stock

Within the limits and restrictions provided in the Company’s Certificate of Incorporation, the Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock, $.0001 par value per share, in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications.

In March 2004, we designated 100,000 shares of preferred stock as Series C Convertible Preferred Stock. In connection with the Company’s reincorporation in Delaware on January 1, 2005, each share of Series C Convertible Preferred Stock was automatically converted into one share of Series A Convertible Preferred Stock (the “Series A Shares”), of which 30,557 were issued and outstanding September 30, 2008.

The Series A Shares accrue a cumulative annual dividend of 7% on the $100 face amount of such shares payable June 15 and December 15 each year in shares of common stock. In the event of a liquidation, dissolution or winding up of the Company, the Series A shares have a liquidation preference of $100 per share (plus all accrued and unpaid dividends thereon) prior to any payment or distribution to holders of our common stock. The Series A Shares are convertible into common stock at a conversion price of $0.30 per share. The conversion price is subject to proportional adjustment in the event of stock splits, stock dividends or reclassifications. Subject to certain exceptions, in the event we issue additional shares of common stock at a purchase price less than the conversion price of the Series A Shares, the conversion price shall be lowered to such lesser price. In the event that the average closing bid price of our common stock is less than $1.00 per share for thirty (30) consecutive trading days at any time after November 17, 2008, we will be required to redeem the Series A Shares by payment of $100 per share plus all accrued and unpaid dividends due thereon.

We are required to obtain the consent of the holders of a majority of the Series A Shares in order to, among other things, issue any shares of preferred stock that are equal to or have a preference over the Series A shares or issue any shares of preferred stock, rights, options, warrants, or any other securities convertible into common stock of the Company, other than those issued to employees of the Company in the ordinary course of their employment or to consultants or other persons providing services to the Company so long as such issuances do not exceed 500,000 shares of common stock. We are also required to obtain such consent in order to, among other things, complete a sale or other disposition of any material assets, complete an acquisition of a material amount of assets, engage in a merger, reorganization or consolidation, or incur or guaranty any indebtedness in excess of $50,000.

As of September 30, 2008, cumulative dividends in arrears related to the Series A preferred stock were approximately $406,754, which have been accreted to the principal balance of the Series A preferred stock.

Warrants

The Company has issued warrants to certain creditors, investors, investment bankers and consultants. A summary of warrant activity is as follows:

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	Total Warrants	Weighted  average  exercise  price		Weighted  average  remaining  life  (in years)	Aggregate  intrinsic  value
Outstanding, as of December 31, 2007	10,566,375	$	0.95
Granted	—	—
Exercised	—	—
Expired	—	—
Outstanding, as of September 30, 2008	10,566,375	0.95		1.27	$	—
Vested or expected to vest at September 30, 2008	10,566,375	0.95		1.27	—
Exercisable at September 30, 2008	10,566,375	0.95		1.27	—

The warrants outstanding and exercisable at September 30, 2008 were in the following exercise price ranges:

	Warrants outstanding and Exercisable
Range of exercise prices	Number of  warrants	Weighted average  remaining life (in years)
$ 0.30	2,798,014	2.36
0.75	533,333	2.86
0.97	150,000	.79
1.00	2,655,552	1.12
1.35	4,429,476	.50
	10,566,375

As part of sale of the Fire business to ZOLL, and repayment of the Company’s convertible debt, both in May 2007, the exercise price of certain warrants was adjusted to $0.30 per share.  The incremental fair value of the modification of $33,817 was allocated to interest expense as a cost of financing.

14.COMPREHENSIVE LOSS

The component of accumulated other comprehensive income was as follows:

	September 30,
	2008
Unrealized gain on available-for-sale securities, net of tax	$	1,109
Total accumulated other comprehensive income	$	1,109

The components of comprehensive income (loss) for the nine months ended September 30, 2008 and 2007 were as follows:

	September 30,			September 30,
	2008			2007
Net Loss	$	(792,381	)	$	(438,570	)
Unrealized gain on securities, net of tax	1,109			—
Total comprehensive loss	$	(791,272	)	$	(438,570	)

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15.SEGMENT INFORMATION

The Company’s consolidated operations are divided into two segments: Law and Biometric. The Company evaluates performance and allocates resources based on revenues and operating income (loss). Operating income (loss) for each segment includes selling, general and administrative expenses directly attributable to the segment in addition to those allocated as a percentage based on the segment’s budgeted revenues. The segmentation of operating income (loss) as noted above and detailed below reflects how management now evaluates its business.  Assets for the company are commingled and are related to all operating segments. Management does not evaluate or identify the operating assets of the segments separately.

Prior to the sale of the Fire business in May 2007, Fire had been reported as a separate segment.  Prior periods presented have been recast accordingly to reflect these operations as discontinued.  Geographically, North American sales accounted for approximately 96% and 100% of the Company’s total sales for the three month periods and 97% and 100% for the nine month periods ended September 30, 2008 and 2007 respectively.

Summarized financial information concerning our reportable segments is shown in the following table:

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2008			2007			2008			2007
Revenue:
Law	$	2,429,803		$	1,890,112		$	6,976,279		$	6,797,192
Biometrics	452,928			277,979			2,026,823			548,999
Consolidated Revenue	$	2,882,731		$	2,168,091		$	9,003,102		$	7,346,191
Segment operating profit/(loss)
Law	114,319			(1,089,674		)	(904,082		)	(3,135,350		)
Biometrics	(305,860		)	(359,773		)	74,607			(1,518,786		)
Total Segment Operating Loss	(191,541		)	(1,449,447		)	(829,475		)	(4,654,136		)
Reconciliation to net loss
Derivative and warrant fair value adjustments	73,600			262,539			62,426			932,991
Interest income	42			4,725			1,339			6,057
Interest expense	(44,960		)	(19,440		)	(62,966		)	(818,757		)
Investment income	118,631						118,631
Loss on extinguishment of debt	—			—			—			(403,940		)
Other expense	(740		)	11,008			(16,882		)	(12,896		)
Net loss from continuing operations	(44,968		)	(1,190,615		)	(726,927		)	(4,950,681		)
Income (loss) from discontinued operations				—			(65,454		)	440,105
Gain on disposal of discontinued operations	—			1,147			—			4,072,006
Net loss	$	(44,968	)	$	(1,189,468	)	$	(792,381	)	$	(438,570	)

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16.INCOME TAXES

On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for the Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 requires that the impact of tax positions be recognized in the financial statements if they are more likely than not of being sustained based on the technical merits of the position. The Company has a valuation allowance against the full amount of its net deferred taxes. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets will not be realized.

As a result of the implementation of FIN No. 48, the Company reduced its deferred tax assets and the associated valuation allowance for gross unrecognized tax affected benefits by approximately $4,000,000. There was no adjustment to accumulated deficit as a result of these unrecognized tax benefits since there was a full valuation allowance against the related deferred tax assets. If these unrecognized tax benefits are ultimately recognized, they would have no impact on the effective tax rate due to the existence of the valuation allowance.

The Company has not been audited by the Internal Revenue Service (“IRS”) or any states in connection with income taxes. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The periods from 2005-2007 remain open to examination by the IRS and state jurisdictions. The Company believes it is not subject to any tax risk beyond the preceding discussion. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three and nine months ended September 30, 2008 and 2007.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

The information contained in this Report on Form 10-Q and in other public statements by the Company and Company officers include or may contain certain forward-looking statements. All statements other than statements of historical facts contained in this Report on Form 10-Q, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure that they will be achieved. Actual results may differ materially from the forward-looking statements contained herein due to a number of factors.

Many of these factors are set forth in the Company’s Annual Report on Form 10-KSB under the caption “Risk Factors” and other filings with the Securities and Exchange Commission. These factors are not intended to represent a complete list of the general or specific factors that may affect us. It should be recognized that other factors, including general economic factors and business strategies may be significant, presently or in the future.  Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

OVERVIEW

BIO-key develops and delivers advanced identification solutions and information services to customers in both the private sector and government, including law enforcement departments, and public safety agencies. Our high-performance, yet easy-to-deploy biometric finger identification technology accurately identifies and authenticates users of wireless and enterprise data, improving security, convenience and privacy while reducing identity theft. Our mobile wireless technology provides first responders with critical, reliable, real-time data and images from local, state and national databases. Today, over 750 police departments in North America depend on BIO-key solutions, making us one of the leading suppliers of mobile and wireless solutions for public safety worldwide

On March 30, 2004, BIO-key acquired Public Safety Group, Inc. (PSG), a privately held company that was a leader in wireless solutions for law enforcement and public safety markets. PSG’s primary technology was PocketCop™, a handheld solution that provides mobile police officers, such as detectives who are not typically in their vehicles, a hand-held mobile information software solution.

On September 30, 2004, BIO-key acquired Aether Systems, Inc.’s Mobile Government Division (“Mobile Government” or “AMG”), a leading provider of wireless data solutions for use by public safety organizations, primarily state, local police, fire and rescue and emergency medical services organizations. Our PacketCluster mobile information software, originally acquired as part of this transaction, is integrated with 50 separate State/NCIC databases, as well as other state, local and federal databases. Its open architecture and its published Application Programming Interface (API) make it easy to interface with a wide range of information sources. PacketCluster products deliver real-time information in seconds, freeing dispatchers to handle more pressing emergencies.

On May 22, 2007, BIO-key completed a transaction with ZOLL Data Systems, Inc. (“ZOLL”), a subsidiary of ZOLL Medical Corporation, in which ZOLL acquired substantially all of the assets related to the Company’s Fire/EMS Services division.

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CRITICAL ACCOUNTING POLICIES

For detailed information on our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and in our Annual Report on Form 10-KSB, for the fiscal year ended December 31, 2007.  There have been no material changes to our critical accounting policies and estimates from those disclosed in our 10-KSB filed on March 26, 2008.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which is effective for calendar year companies on January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. Management has adopted SFAS 157.  The adoption of SFAS 157 had no impact on the Company’s financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which is effective for calendar year companies on January 1, 2008. The statement allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. The adoption of SFAS 159 had no impact on the Company’s financial condition and results of operations.

In December 2007, the SEC issued SAB No. 110.  SAB 110 allows for the continued use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS 123 (revised 2004).  Originally the SEC staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007.  Accordingly, the SEC staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.  The Company will continue to use of the simplified method for determining the value of options granted as allowed by SAB 110.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS No. 141(R)) which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.  SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS No. 141(R) are applicable to business combinations consummated on or after December 15, 2008 with early adoption prohibited.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”  (SFAS No. 160) which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary for the deconsolidation of a subsidiary.  SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim statements within those fiscal years. The Company does not currently have any noncontrolling interests.

In March 2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” (SFAS No.161) which amends and expands the disclosure requirements related to derivative instruments and hedging activities. The Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The provisions of SFAS 161 are effective for the fiscal year beginning January 1, 2009. The company will comply

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with the disclosure requirements of this statement if it utilizes derivative instruments or engages in hedging activities upon its effectiveness.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2008

AS COMPARED TO SEPTEMBER 30, 2007

INTRODUCTION

Over the past few years, the Company has integrated the products, operations and technology acquired from PSG and AMG and restructured its operations into three business segments: Biometrics, Law Enforcement and Fire Safety, the last of which was sold in May 2007 to ZOLL. Our Biometrics and Law Enforcement segments are headed by a General Manager and are organized to quickly respond to market needs as well as to drive down costs to achieve profitability.

A detailed analysis of both segments can be found below.

Consolidated Results of Operations - Percent Trend

	Three Months Ended September 30,
	2008		2007
Revenues
Services	64	%	70	%
License fees and other	36	%	30	%
	100	%	100	%
Costs and other expenses
Cost of services	10	%	16	%
Cost of license fees and other	4	%	5	%
	14	%	21	%
Gross Profit	86	%	79	%
Operating expenses
Selling, general and administrative	55	%	89	%
Research, development and engineering	38	%	57	%
	93	%	146	%
Operating Loss	(7	)%	(67	)%
Other Income (Deductions)
Total Other Income	5	%	12	%
Net Loss from continuing operations	(2	)%	(55	)%
Net Loss from discontinued operations	0	%	0	%
Gain on disposal of discontinued operations	0	%	0	%
Net Loss	(2	)%	(55	)%

The Company evaluates performance and allocates resources based on revenues and operating income (loss). Operating income (loss) for each segment includes selling, general and administrative expenses directly attributable to the segment in addition to those allocated as a percentage based on the segments revenues and other factors. The segmentation of operating income as noted above and detailed below reflects how management now evaluates its business. Assets for the Company are commingled and are related to all operating segments. Management does not evaluate or identify the operating assets of the segments separately.

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	Three months ended
	September 30,
	2008		2007		$ Change			% Change
Revenues
Law Enforcement
Service	$	1,780,428	$	1,504,452	$	275,976		18	%
License & other	649,375		385,660		263,715			68	%
	2,429,803		1,890,112		539,691			29	%
Biometrics
Service	58,121		12,370		45,751			370	%
License & other	394,807		265,609		129,198			49	%
	452,928		277,979		174,949			63	%
Total Revenue	$	2,882,731	$	2,168,091	$	714,640		33	%
Cost of goods sold
Law Enforcement
Service	$	286,122	$	346,884	$	(60,762	)	(18	)%
License & other	25,995		24,195		1,800			7	%
	312,117		371,079		(58,962		)	(16	)%
Biometrics
Service	14,358		13,080		1,278			10	%
License & other	80,768		77,452		3,316			4	%
	95,126		90,532		4,594			5	%
Total COGS	$	407,243	$	461,611	$	(54,368	)	(12	)%

Revenues

Law Enforcement

Service revenue for the segment for the three month period ended September 30, 2008 increased by 18% as a result of increased maintenance revenue from new license orders.

License and other revenue for the three month period ended September 30, 2008 increased 68% from the same period in 2007. The increase in the 2008 revenue was due to an increase in the size and volume of orders including a $175,000 order from an existing customer.

Biometrics

For the three months ended September 30, 2008, Service revenue increased 370% from the same period in 2007 as a result of maintenance revenue associated with new license orders.

License and other revenue for the three months ended September 30, 2008 increased 49% as a result of revenue generated from a new international customer, as well as additional license revenue from existing customers.

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Costs of goods sold

Law Enforcement

Cost of services for the three months ended September 30, 2008 decreased approximately 18% from the same period in 2007 due to lower personnel related expenses.

Cost of licenses for the three months ended September 30, 2008 increased by approximately 7% from the same period in 2007 due to an increase in revenue related third-party software and royalty costs.

Biometrics

For the three months ended September 30, 2008, cost of services increased approximately 10% from the same period in 2007 due to a slight increase in outside training and installation services.

License and other costs increased for the three months ended September 30, 2008 from the same period in 2007 by approximately 4% as orders with third party software increased, offset by a decrease in hardware orders.

Selling, general and administrative

	Three months ended
	September 30,
	2008		2007		$ Change			% Change
Law Enforcement	$	1,163,540	$	1,615,888	$	(452,348	)	(28	)%
Biometrics	421,090		319,782		101,308			32	%
Total	$	1,584,630	$	1,935,670	$	(351,040	)	(18	)%

Law Enforcement & Biometrics

SG&A expenses decreased by 18% for the three months ended September 30, 2008 from the same period in 2007 due to lower personnel related expenses, stock compensation charges and fees for professional services, offset by higher commission expense in the Biometrics segment.  As referenced above, the Company will continue to allocate resources based on revenue and operating income and expects that SG&A expenses will remain at approximately the same level for the remainder of 2008.

Research, development and engineering

	Three months ended
	September 30,
	2008		2007		$ Change			% Change
Law Enforcement	$	839,826	$	992,820	$	(152,994	)	(15	)%
Biometrics	242,573		227,437		15,136			7	%
Total	$	1,082,399	$	1,220,257	$	(137,858	)	(11	)%

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Law Enforcement

Research, development and engineering expenses decreased by 15% for the three months ended September 30, 2008 from the same period in the prior year, driven largely by reductions in facilities and personnel related expenses.

Biometrics

Research, development and engineering expenses increased by 7% for the three months ended September 30, 2008 from the same period in 2007, due to an increase in consultant expenses.

Other income and expense

	Three months ended
	September 30,
	2008			2007			$ Change			% Change
Derivative and warrant fair value adjustments	$	73,600		$	262,539		$	(188,939	)	(72	)%
Interest income	42			4,725			(4,683		)	(99	)%
Interest expense	(44,960		)	(19,440		)	(25,520		)	131	%
Investment income	118,631						118,631			100	%
Other income (expense)	(740		)	11,008			(11,748		)	(107	)%
Total	$	146,573		$	258,832		$	(112,259	)	(43	)%

For the quarter ended September 30, 2008, derivative and warrant fair value adjustments decreased, when compared to the 2007 period, due to changes in the fair market value of embedded derivatives and detachable warrants issued with convertible debt issued in 2004 and 2005, as well as additional derivatives recorded as a result of financings in 2006. The fair value of the derivatives will fluctuate based on our stock price on the valuation date, the debt conversion price, the volatility of our stock price over a period of time, changes in the value of the risk free interest rate and the time to maturity of the outstanding instruments at different points in time.

For the quarter ended September 30, 2008, interest expense increased 131% as compared to the same quarter in 2007.  The increase was attributable the repayment of note payable.  Interest expense includes actual cash paid for interest and deferred charges.

For the quarter ended September 30,2008, investment income increased 100% as an “available-for-sale” security was sold at its market value and the income was realized.

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NINE MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED TO SEPTEMBER 30, 2007

Consolidated Results of Operations - Percent Trend

	Nine Months Ended September 30,
	2008		2007
Revenues
Services	60	%	69	%
License fees and other	40	%	31	%
	100	%	100	%
Costs and other expenses
Cost of services	10	%	16	%
Cost of license fees and other	4	%	3	%
	14	%	19	%
Gross Profit	86	%	81	%
Operating expenses
Selling, general and administrative	56	%	91	%
Research, development and engineering	39	%	53	%
	95	%	144	%
Operating loss	(9	)%	(63	)%
Other Income (Deductions)
Total Other Income (Deductions)	1	%	(4	)%
Net Loss from continuing operations	(8	)%	(67	)%
Net Income (Loss) from discontinued operations	(1	)%	6	%
Gain on disposal of discontinued operations	—		55	%
Net Loss	(9	)%	(6	)%

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The Company evaluates performance and allocates resources based on revenues and operating income (loss). Operating income (loss) for each segment includes selling, general and administrative expenses directly attributable to the segment in addition to those allocated as a percentage based on the segments’ revenues and other factors. The segmentation of operating income as noted above and detailed below reflects how management now evaluates its business.  Assets for the Company are commingled and are related to all operating segments. Management does not evaluate or identify the operating assets of the segments separately.

	Nine months ended
	September 30,
	2008		2007		$ Change			% Change
Revenues
Law Enforcement
Service	$	5,246,497	$	5,045,899	$	200,598		4	%
License & other	1,729,782		1,751,293		(21,511		)	(1	)%
	6,976,279		6,797,192		179,087			3	%
Biometrics
Service	137,666		43,566		94,100			216	%
License & other	1,889,157		505,433		1,383,724			274	%
	2,026,823		548,999		1,477,824			269	%
Total Revenue	$	9,003,102	$	7,346,191	$	1,656,911		23	%
Cost of goods sold
Law Enforcement
Service	$	893,466	$	1,117,064	$	(223,598	)	(20	)%
License & other	184,599		72,418		112,181			155	%
	1,078,065		1,189,482		(111,417		)	(9	)%
Biometrics
Service	43,348		90,369		(47,021		)	(52	)%
License & other	148,489		123,833		24,656			20	%
	191,837		214,202		(22,365		)	(10	)%
Total COGS	$	1,269,902	$	1,403,684	$	(133,782	)	(10	)%

Revenues

Law Enforcement

For the nine months ended September 30, 2008, service revenue increased by 4% from the same period in 2007 as a result of increased maintenance revenue from new orders, offset slightly by cancellations of existing customers.

License and other revenue for the nine months ended September 30, 2008 is approximately the same as the corresponding period in 2007.  The company continues to receive orders from both existing and new customers at a rate higher than the nine month period ended September 30, 2007 which included $310,000 from a cash payment that the Company received for long term project.

Biometrics

Service revenue for the nine months ended September 30, 2008 increased 216% as the Company has added new maintenance customers during the period.

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License & other revenue increased 274% as a result of revenue generated from a new OEM customer, as well as additional license revenue from existing customers.

Costs of goods sold

Law Enforcement

Cost of services for the nine months ended September 30, 2008 decreased 20% from the same period in 2007 due to lower personnel related expenses.

Cost of License & other for the nine months ended September 30, 2008 increased by 155% from the nine months ended September 30, 2007 as a result of an increase in third-party software and royalty costs.

Biometrics

Cost of services decreased 52% from the same period in 2007 due to lower personnel related expenses.  The Company expects these costs will increase in future periods as additional Biometric customers are added.

Costs of License and other for the nine months ended September 30, 2008 increased 20% due to an increase in hardware and third party software costs.

Selling, general and administrative

	Nine months ended
	September 30,
	2008		2007		$ Change			% Change
Law Enforcement	$	4,086,407	$	5,635,064	$	(1,548,657	)	(27	)%
Biometrics	982,621		1,064,382		(81,761		)	(8	)%
Total	$	5,069,028	$	6,699,446	$	(1,630,418	)	(24	)%

SG&A costs for the nine months ended September 30, 2008 decreased 24% compared to the same period in 2007.  For the nine months ended September 30, 2007, the Company incurred $426,000 in legal and regulatory costs associated with the failed attempted acquisition of a Canadian company.  Also contributing to the decline were lower personnel related expenses, stock compensation charges and fees for professional services.

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Research, development and engineering

	Nine months ended
	September 30,
	2008		2007		$ Change			% Change
Law Enforcement	$	2,715,888	$	3,107,995	$	(392,107	)	(13	)%
Biometrics	777,759		789,202		(11,443		)	(1	)%
Total	$	3,493,647	$	3,897,197	$	(403,550	)	(10	)%

Law Enforcement & Biometrics

For the nine months ended September 30, 2008, R & D costs decreased 10% from the nine months ended September 30, 2007 due to reductions in facilities and personnel related expenses, offset slightly by an increase in consultant expense in the Biometrics segment.

Other income and expense

	Nine months ended
	September 30,
	2008			2007			$ Change			% Change
Derivative and warrant fair value adjustments	$	62,426		$	932,991		$	(870,565	)	(93	)%
Interest income	1,339			6,057			(4,718		)	(78	)%
Interest expense	(62,966		)	(818,757		)	755,791			(92	)%
Investment income	118,631			—			118,631			100	%
Loss on extinguishment of debt	—			(403,940		)	403,940			(100	)%
Other income (expense)	(16,882		)	(12,896		)	(3,986		)	31	%
Total	$	102,548		$	(296,545	)	$	399,093		(135	)%

For the nine months ended September 30, 2008, derivative and warrant fair value adjustments decreased 93%, when compared to the 2007 period, due to changes in the fair market value of embedded derivatives and detachable warrants issued with convertible debt issued in 2004 and 2005, as well as additional derivatives recorded as a result of financings in 2006. The fair value of the derivatives will fluctuate based on our stock price on the valuation date, the debt conversion price, the volatility of our stock price over a period of time, changes in the value of the risk free interest rate, and the time to maturity of the outstanding instruments at different points in time.

For the nine months ended September 30, 2008, interest expense decreased 92% as compared to the same period in 2007.  The decrease was attributable to reductions in convertible debt, related discount and other debt related instruments due to the Company restructuring in August 2006, the expiration of the letter of credit arrangement with Aether Systems Inc. on December 31, 2006, and the repayment of all debt in May 2007.  Interest expense includes actual cash paid for interest, as well as non-cash charges for amortization of debt discounts and deferred charges.

For the nine months ended September 30,2008, investment income increased 100% as an “available-for-sale” security was sold at its market value and the income was realized.

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The balance of unamortized debt discounts, deferred financing charges, and derivatives with respect to the 2004 and 2005 financings were extinguished as part of the May 2007 debt repayment. The changes represented non-cash income and expense charges to the statement of operations and were classified as loss on extinguishment of debt.

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended September 30, 2008, net cash used in operations was approximately $383,000.  Of this amount, approximately $367,000 was from continuing operations and approximately $16,000 was from discontinued operations.  The cash used for continuing operations was primarily due to the following items:

·Positive cash flow due to a decrease in accounts receivable and cost and earnings in excess of billings on uncompleted contracts of approximately $334,000,

·Negative cash flows from a decrease in accounts payable, accrued liabilities and notes payable of approximately $1,186,000,

·Negative cash flows from a decrease in deferred rent of approximately $363,000 which represents the difference between the rent payment and the rent expense,

·Positive cash flows from an increase in deferred revenue of approximately $598,000 due to the timing of billings.

The following non-cash items reflected in the Company’s statement of operations are used to reconcile the net loss to the net cash used in operating activities during the nine months ended September 30, 2008:

·The Company issued notes in 2004, 2005 and 2006 and preferred stock in 2006, all of which contained embedded derivatives, and associated warrants. In 2008, the Company recognized a gain of approximately $62,000 related to the decrease in value of the derivatives and associated warrants. The decrease in value is driven mainly by the decrease in value of the underlying BIO-key stock.

·The Company recorded approximately $557,000 of charges in 2008 for the expense of amortizing intangible assets.

·The Company recorded approximately $383,000 of charges in 2008 for the expense of issuing options to employees for services.

Net cash provided by investing activities for the nine months ended September 30, 2008 was approximately $535,000, including approximately $585,000 provided by continuing operations, offset by $50,000 used by the discontinued Fire business. The cash provided by investing activities for continuing operations was primarily driven by approximately $480,000 in deposits for the Company’s Marlborough facility that were used to offset the Company’s rent payments.  Additionally, there was $153,000 that was released from the escrow account established as part of the sale of the Fire business, offset by approximately $40,000 used to support a letter of credit in conjunction with the Company’s new lease for its Marlborough facility.  The $50,000 used for discontinued operations was related to the settlement of a customer claim associated with the discontinued Fire business.

Working capital deficit at September 30, 2008 was approximately $5,161,000, as compared to a deficit of approximately $5,796,000 at December 31, 2007, the improvement of which was driven largely by the reduction of accounts payable, accrued liabilities and notes payable of approximately $1,186,000,

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somewhat offset by a reduction in deposits.

Since January 7, 1993 (date of inception), our capital needs have been principally met through proceeds from the sale of equity and debt securities.

We do not expect any material capital expenditures during the next twelve months.

We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution.

Liquidity outlook

At September 30, 2008 our total of cash and cash equivalents was $1,117,297 as compared to $964,774 at December 31, 2007.

As discussed above, the Company has financed itself through access to the capital markets by issuing debt securities, convertible preferred stock and common stock. We currently require approximately $920,000 per month to conduct our operations. During the first nine months of 2008, we generated approximately $9,003,000 of revenue and achieved profitability in the three months ended June 30, 2008. For the three months ended September 30, 2008, we had a net loss of approximately $45,000.  While the Company expects to reach profitability during the remainder of 2008, there can be no assurance that we will achieve that goal.

During the three months ended March 31, 2008, the Company received invoices of approximately $2,300,000 from a vendor that had been a subcontractor on a long term project for which the Company was the prime contractor.  This amount had previously been recorded as an Accrued Liability and has now been moved to Notes Payable.  On July 28, 2008, the Company reached agreement with the vendor to resolve all matters relating to these invoices.  Pursuant to this agreement, the parties agreed to a payment schedule under which the Company will be required to satisfy this outstanding balance, plus interest at seven percent (7%) per annum on the unpaid portion of the balance, in full on or before June 1, 2009.

The Company’s Series A Convertible Preferred Stock is redeemable in cash by the stockholders within 10 days after December 31, 2008 if certain stock price performance conditions are not met. This date was deferred from March 31, 2008 by an agreement with the holders of the Series A Shares on March 24, 2008.

In addition, the Company’s Series B and Series C Convertible Preferred Stock is redeemable in cash by the stockholders during the first quarter of 2009 if certain stock price performance conditions are not met.

Due to several factors, including our history of losses and limited revenue, our former and current independent auditors have included an explanatory paragraph in opinions they have previously issued related to our annual financial statements as to the substantial doubt about our ability to continue as a going concern. Our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing. The recent financial crisis in the global capital markets and the current negative global economic trends have had an adverse impact on market participants including, among other things, volatility in security prices, diminished liquidity, and limited access to financing.  These events could, therefore, effect our efforts to commercialize our technology and to obtain adequate financing.  In particular, these conditions could impact the ability and willingness of our current and prospective customers to make investments in our technology and pay their obligations to us.  In addition, to the extent that we require additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to meet our needs, or that such financing would not be dilutive to existing stockholders. If available financing is insufficient or we fail to continue to generate meaningful revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or acquisition candidates, or continue as a going concern.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13(a)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was carried out by the Company under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

During the review of the Company’s operating results for the period covered by this report, our CEO and CFO determined that, as of September 30, 2008, our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission rules and forms.  Our management reached this conclusion after identifying our system to capture disclosure items, our internal process of review for account reconciliations, our documentation of internal controls and our internal process for preparing our quarterly report on Form 10-Q for the quarterly period ended September 30, 2008 as being adequate to provide such assurance.   In conjunction with this evaluation, our Board of Directors undertook a review of management’s process, including with respect to internal communications, used to reach its conclusion regarding the Company’s disclosure controls and procedures in order to further the Board’s understanding of this process.

Changes in Internal Control Over Financial Reporting.

No change in our internal control over financial reporting occurred during the fiscal quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 6. EXHIBITS

The exhibits listed in the Exhibits Index immediately preceding such exhibits are filed as part of this Report.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BIO-Key International, Inc.
Dated: November 14, 2008	/s/ Michael W. DePasquale
	Michael W. DePasquale
	Chief Executive Officer
Dated: November 14, 2008	/s/ Francis J. Cusick
	Francis J. Cusick
	Chief Financial Officer

38

EXHIBIT INDEX

Exhibit No.	Description
10.1 (1)	Settlement and Mutual Release Agreement, dated July 28, 2008, by and between the Company and Dataradio Corporation.
10.2 (1)	Office Lease Agreement, dated July 28, 2008, by and between the Company and Normandy Nickerson Road, LLC
31.1(1)	Certificate of CEO of Registrant required under Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2 (1)	Certificate of CFO of Registrant required under Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1(1)	Certificate of CEO of Registrant required under 18 U.S.C. Section 1350
32.2 (1)	Certificate of CFO of Registrant required under 18 U.S.C. Section 1350

(1)Filed herewith

EX-10.1

Exhibit 10.1

SETTLEMENT AND MUTUAL RELEASE AGREEMENT

This Agreement (“Agreement”) is made effective as of July 28, 2008, by and between DATARADIO CORPORATION, a Delaware corporation (“Dataradio”), on the one hand, and BIO-KEY INTERNATIONAL, INC., a Delaware corporation (“BIO-key”), on the other hand.  Dataradio and BIO-key may hereinafter individually be referred to as a “Party” and shall hereinafter collectively be referred to as the “Parties”.  Myers, Widders, Gibson, Jones & Schneider, LLP is also a party to this Agreement, solely for the purpose of serving as the Escrow Agent under Section 5 hereof.  This Agreement is entered into with regard to the following facts:

R E C I T A L S

WHEREAS, on or about June 1, 2003, BIO-key’s predecessor-in-interest, Aether Systems, Inc. (“Aether”), entered into a Subcontractor Agreement with Dataradio (the “Subcontractor Agreement”).  BIO-key is the successor-in-interest to the rights and obligations of Aether under the Subcontractor Agreement.  Pursuant to the terms of the Subcontractor Agreement, among other things, Dataradio agreed to provide equipment, products, goods, software and documentation to Aether in connection with the “Copsmart Project” for Aether’s customer, Hamilton County, Ohio; and

WHEREAS, as of April 3, 2008, the balance owing Dataradio by BIO-key pursuant to the Subcontractor Agreement amounted to $2,356,771.00 comprised of $2,149,030.00 owed pursuant to Dataradio invoice number 273 dated January 18, 2008 and $207,741.00 representing amounts retained by BIO-key under previous Dataradio invoices; and

WHEREAS, on April 3, 2008, counsel for Dataradio submitted a demand for payment to BIO-key demanding payment in the sum of $2,356,771.00 (the “Claim”); and

1

WHEREAS, without admission of any liability or fault, and to avoid the expense and uncertainties of litigation, the Parties wish to settle the Claim, and agree as follows:

NOW, THEREFORE, FOR GOOD CAUSE AND VALUABLE CONSIDERATION, THE ADEQUACY OF WHICH IS HEREBY ACKNOWLEDGED, THE PARTIES EXPRESSLY AGREE AS FOLLOWS:

T E R M S  O F  S E T T L E M E N T

1.Payment Terms.

A.BIO-key shall pay to Dataradio the sum of $2,356,771.00 (the “Balance”), plus interest at seven percent (7%) per annum on the unpaid balance in accordance with the payment terms and schedule set forth in Attachment “A” hereto and incorporated herein by reference (the “Promised Installment Payments”).  The first “Total Payment” due under the Promised Installment Payments shall be immediately due and payable to Dataradio upon execution of this Agreement by both Parties.

B.As indicated on Attachment “A”, BIO-key anticipates receiving payments from Hamilton County, Ohio on or about September 1, 2008 in the sum of $236,538.00, and on or about April 1, 2009, in the sum of $808,452.00 (the “Hamilton County Monies”).   Notwithstanding Section 2 hereof, in the event these payments are made by Hamilton County, Ohio to BIO-key directly, within three (3) business days following actual receipt of any or all of the Hamilton County Monies by BIO-key, BIO-key agrees to deliver to Dataradio, in the manner provided in Section 1.E. hereof, the full amount of such payments actually received by BIO-key, without deduction or offset of any kind, which amounts actually received by Dataradio shall be applied to the Balance.  In the event any or all of the Hamilton County Monies are not received by BIO-key or Dataradio, the total amount of the Hamilton County Monies not received shall

2

continue to be included in the Balance and such amount shall be paid at the time of the June 1, 2009 scheduled payment by BIO-key to Dataradio contemplated under the Promised Installment Payments.

C.The total of any unpaid Balance and accrued interest is due and payable on June 1, 2009.

D.All payments made shall first be applied to interest then due and the balance applied to the principal to reduce the balance thereof.

E.All Promised Installment Payments made by BIO-key or on behalf of BIO-key shall be made payable to “Dataradio” and delivered to Erik B. Feingold, Esq. c/o the law offices of Myers, Widders, Gibson, Jones & Schneider, LLP, 5425 Everglades Street, Ventura, California 93003 (the “Payment Address”).

F.BIO-key shall be entitled to pre-pay, in whole or in part, the remaining unpaid Balance plus accrued interest at any time without penalty.

2.Assignment of Hamilton County Monies.  BIO-key does hereby irrevocably convey, transfer and assign to Dataradio all of BIO-key’s right, title and interest in and to the Hamilton County Monies.  Concurrently with the execution of this Agreement, BIO-key shall execute the Assignment Agreement, attached hereto as Attachment “B” (the “Hamilton County Assignment”), which assignment instructs Hamilton County, Ohio to make all payments of the Hamilton County Monies payable directly to Dataradio and delivered to the Payment Address.  Upon execution of the Hamilton County Assignment, BIO-key shall deliver, or shall cause to be delivered, the executed Hamilton County Assignment to Hamilton County, Ohio.

3.Default.  So long as there is no Uncured Default (as defined in Section 4, below)

3

existing, Dataradio and counsel for Dataradio shall forbear from demanding the payment of the Claim and from exercising, directly or indirectly, any of Dataradio’s rights and remedies against BIO-key with respect to the Claim and any amounts related thereto.  The occurrence of any one or more of the following events, acts or occurrences, unless otherwise waived in writing by Dataradio, shall constitute an event of default (each an “Event of Default”):  (i) BIO-key shall fail to pay as and when due any installment required pursuant to the Promised Installment Payments, or shall fail to pay any interest or other amounts payable under this Agreement as and when due; or (ii) BIO-key shall fail to perform, comply with or observe any agreement, covenant or obligation under Section 7 of this Agreement.  Upon the occurrence of an Event of Default, Dataradio or its counsel shall give notice thereof to BIO-key and its counsel, and BIO-key shall have until the seventh (7th) business day following the date of its receipt of Dataradio’s notice (the “Cure Date”) to cure the Event of Default.  Said notice shall specify the exact Cure Date to cure any monetary Event of Default.  Cure of an Event of Default pertaining to the payment of money shall require that the delinquent payment be received at the Payment Address on or prior to the Cure Date with readily available funds, which shall be accomplished solely by cashier’s check or the wire transfer of funds.  Cure of an Event of Default pertaining to any act or failure to act by BIO-key resulting in a breach of this Agreement other than for the payment of money, shall require that such Event of Default be fully cured on or prior to the Cure Date, or, if the nature of the Event of Default is such that more than seven (7) business days are reasonably required for its cure, BIO-key shall not be deemed to be in default if BIO-key promptly commences the cure on or prior to the Cure Date and diligently and continuously prosecutes such cure to completion within fourteen (14) business days following the Cure Date.  Notwithstanding

4

the notice and cure periods set forth above, any Event of Default occurring more than twice during a twelve (12) month period shall be immediately deemed an Uncured Default (as defined below), and Dataradio shall be entitled, without notice to BIO-key or its attorney, to proceed as provided herein.

4.Remedies Upon Event of Default.  In the event there exists an Event of Default that, after the giving of notice as and if required under this Agreement, is not timely cured as set forth in Section 3 above (an “Uncured Default”), then the entire unpaid Balance, plus accrued and unpaid interest due thereon, shall automatically become immediately due and payable, and Dataradio and counsel for Dataradio shall be entitled to proceed with entry of judgment (the “Judgment”) for the amount of the unpaid Balance, plus accrued and unpaid interest due thereon.

5.Confession of Judgment.

A.Concurrently with the execution of this Agreement, BIO-key will (i) execute a Confession of Judgment Statement and provide an Attorney’s Declaration in support of the Confession of Judgment Statement in the forms attached collectively as Attachment “C” (the “Judgment Documents”) and (ii) deliver the Judgment Documents to the law offices of Myers, Widders, Gibson, Jones & Schneider, LLP, 5425 Everglades Street, Ventura, California 93003 (the “Escrow Agent”), to be held in escrow in accordance with this Agreement.  Notwithstanding anything contained herein, neither Dataradio nor the Escrow Agent shall file or record the Judgment Documents in any manner until there occurs an Uncured Default and the procedures described in Section 5.B(i) below have been satisfied.

5

B.The Escrow Agent shall release the Judgment Documents from escrow as follows:

(i)In the event that the Escrow Agent receives a written declaration under penalty of perjury by an authorized representative of Dataradio stating that an Uncured Default has occurred and attesting to the facts and circumstances surrounding the Event of Default and the Uncured Default, the Escrow Agent shall deliver the Judgment Documents to Dataradio.  Dataradio may then file the Judgment Documents, which filing shall include the declaration described in the preceding sentence, and obtain, by ex parte application in any court of competent jurisdiction in the states of either California, Massachusetts, New Jersey or Minnesota, a judgment against BIO-key as set forth in the Judgment Documents, for the amount of the unpaid Balance, plus accrued and unpaid interest due thereon.  Dataradio may record and enforce the judgment against BIO-key to the fullest extent allowed by law.

(ii)If no Uncured Default occurs, upon Dataradio’s receipt of the entire unpaid Balance, plus accrued and unpaid interest thereon, pursuant to this Agreement, Dataradio shall, within one (1) business day after receiving such final payment, deliver written notice to the Escrow Agent that such payment has been made.  Within two (2) business days after receiving such notice, the Escrow Agent shall deliver the Judgment Documents to BIO-key.

C.Should the Judgment Documents be rejected by the Clerk of the Court in any of the states of California, Massachusetts, New Jersey or Minnesota for any reason, or should the Courts in any of the states of California, Massachusetts, New Jersey or Minnesota decline to enter judgment in Dataradio’s favor on the Judgment Documents, then BIO-key will reasonably cooperate in providing Dataradio, or the Court with any and all different or additional documents as may prove necessary in order to have the Judgment entered, consistent with the purposes of this Agreement.

6

6.No Appeal from Judgment.  BIO-key acknowledges and agrees that the payment of the Balance which is settled and resolved by this Agreement, and upon which the Judgment would be based is subject to being confessed by judgment.  Accordingly, and in recognition of the fact that such Judgment would be entered by Confession of Judgment, BIO-key acknowledges and agrees that BIO-key has, or would have, no right of appeal from such judgment; nevertheless, BIO-key hereby unconditionally and irrevocably surrenders and waives any and all rights of appeal from such Judgment that BIO-key may arguably have, on any ground whatsoever.

7.Covenants of BIO-key.

A.Preservation of Existence.  So long as any portion of the Balance shall remain unpaid, BIO-key shall, unless Dataradio shall otherwise consent in writing, maintain and preserve, , its existence, rights and privileges, and become or remain, , duly qualified and in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary.

B.Compliance with Laws.  So long as any portion of the Balance shall remain unpaid, BIO-key shall, unless Dataradio shall otherwise consent in writing, comply, in all material respects, with all applicable laws, rules, regulations, orders, judgments and awards.

C.Liens.  So long as any portion of the Balance shall remain unpaid, BIO-key shall not, unless Dataradio shall otherwise consent in writing, (i) create, incur, assume or suffer to exist, or permit any of its subsidiaries to create, incur, assume or suffer to exist, any lien, mortgage, deed of trust, pledge, security interest, charge or other encumbrance or security, including any financing lease, deposit arrangement or assignment intended as, or having the

7

effect of, security (a “Lien”), upon or with respect to any of its properties or assets, of any kind or nature, tangible or intangible, and wherever located, whether now or hereafter acquired; (ii) file or knowingly suffer to exist under the Uniform Commercial Code or any similar law or statute of any jurisdiction, a financing statement that names it or any of its subsidiaries as debtor; or (iii) sign or suffer to exist any security agreement; other than, as to all of the above, Permitted Liens.  For purposes of this Agreement, “Permitted Liens” shall mean (u) liens for current taxes and assessments not yet due and payable, (v) mechanics’ liens arising in the ordinary course of business, (w) such Liens that may exist as of the date hereof on account of that certain Subordinated Secured Promissory Note dated September 30, 2004 issued by BIO-key and Public Safety Group, Inc. in favor of Aether Systems, Inc., as amended by Amendment No. 1 dated as of January 23, 2006; (x) such Liens that may exist as of the date hereof on account of that certain Securities Purchase Agreement, dated as of January 23, 2006, by and among BIO-key, The Shaar Fund Ltd., Longview Fund, L.P. and Longview Special Finance; (y) such Liens that may exist as of the date hereof on account of that certain Securities Exchange Agreement, dated as of August 10, 2006, by and among BIO-key, The Shaar Fund Ltd., Longview Fund, L.P., Longview Special Finance and certain other holders of BIO-key’s Subordinated Convertible Promissory Notes; and (z) a security interest in BIO-key’s deposit accounts, in an amount not to exceed $50,000, granted to a commercial bank to secure payment and performance under a letter of credit established in conjunction with BIO-key’s lease of its Marlborough, Massachusetts office.

D.Dividends.  So long as any portion of the Balance shall remain unpaid, BIO-key shall not, unless Dataradio shall otherwise consent in writing, declare or pay any cash dividend or other cash distribution, direct or indirect, on account of any capital stock of BIO-key

8

or any of its subsidiaries, now or hereafter outstanding.

E.Fundamental Change.  If a Fundamental Change (as defined below) shall occur at any time while any portion of the Balance shall remain unpaid, the entire unpaid Balance shall be immediately paid by BIO-key to Dataradio, plus accrued and unpaid interest; provided, however, if the Fundamental Change results in Net Cash Proceeds (as defined below) equal to less than the then-unpaid Balance, BIO-key shall pay to Dataradio an amount equal to one hundred percent (100%) of such Net Cash Proceeds, which shall reduce the Balance by such amount, and this Agreement shall remain in full force and effect.  For purposes of this Agreement, a “Fundamental Change” shall mean the occurrence of any of the following:  (i) consummation of any share exchange, consolidation, or merger of BIO-key, or any sale, lease or other transfer in one transaction or series of transactions, of all or substantially all of the assets of BIO-key and its subsidiaries, taken as a whole, or an operating division thereof, to any person other than BIO-key or one of its subsidiaries, or (ii) the winding-up, liquidation or dissolution of BIO-key.  For purposes of this Agreement, “Net Cash Proceeds” means the amount of cash actually received from time to time, from any source whatsoever, related to a Fundamental Change by or on behalf of BIO-key or its subsidiaries after deducting therefrom only (w) amounts then owed by BIO-key or its subsidiaries to the holders of any Permitted Liens, (x) bona fide and verified out-of-pocket costs and expenses related thereto incurred by BIO-key or its subsidiaries in connection therewith, (y) transfer taxes paid to any taxing authorities by BIO-key or its subsidiaries in connection therewith, and (z) net income taxes to be paid in connection therewith (after taking into account any tax credits or deductions).

F.Maintenance of Properties.  BIO-key shall, and shall cause each of its

9

subsidiaries to, maintain or cause to be maintained in good repair, working order and condition (ordinary wear and tear excepted) all properties and other assets useful or necessary to its business.

8.Jurisdiction and Venue.  As further set forth in this Section 8, this Agreement shall and in all respects be governed by and construed in accordance with the laws of the states of California, Massachusetts, New Jersey and/or Minnesota, depending upon the nature of the dispute and where a Judgment is sought to be obtained, applicable to agreements of this nature made and fully to be performed in such states by residents thereof.  Each party hereby submits itself, to the fullest extent permitted by applicable law, to the jurisdiction and venue of the states of California, Massachusetts, New Jersey or Minnesota with respect to entry of the Judgment and hereby waives any and all objections it may have with respect to the jurisdiction of such forums or the inconvenience of such forums or venues.  Except for the entry of the Judgment, with respect to any other dispute, controversy, interpretation or differences which may arise between or among the Parties out of or in connection with this Agreement or breach thereof, each party hereby submits itself, to the fullest extent permitted by applicable law, to the jurisdiction and venue of the State of California and hereby waives any and all objections it may have with respect to the jurisdiction of such forum or the inconvenience of such forum or venue.

9.Release of Claims.  Except as otherwise set forth in this Agreement, in consideration for this Agreement and the other consideration set forth hereinabove all acknowledged as adequate, the Parties hereto release and forever discharge, subject to the rights available to Dataradio upon the occurrence of an Uncured Default, each other and their predecessors, successors, heirs, assigns, employees, owners, agents, attorneys, subsidiaries,

10

insurance carriers and divisions or affiliated corporations with which they were previously or hereinafter affiliated in any manner (also jointly referred to herein as “Released Parties”), from any and all claims, demands, causes of action, obligations, damages, attorney’s fees, costs and liabilities, whether or not now known, suspected or claimed, which the Parties ever had, now have, or may claim to have against Released Parties, or any of them, as of the date the Parties execute this Agreement by reason of any act or omission solely regarding the Claim.  Notwithstanding any other provision of this Agreement, the releases contained herein shall not limit, affect, or apply to any of the Parties’ obligations under this Agreement.  It is also expressly understood and agreed between the Parties that this Agreement does not apply to any other claims between the Parties other than the Claim.  The release set forth hereinabove is a limited general release of all claims, demands, causes of action, obligations, damages and liabilities of any nature whatsoever that are described in the release and is intended to encompass all known and unknown, foreseen or unforeseen claims which the parties to this Agreement hereto may have as of the date the releasing Parties execute this Agreement or by reason of any act or omission concerning any matter or thing stated, claimed or alleged, or could have been alleged solely regarding the Claim.  The Parties hereto acknowledge that they may hereafter discover facts different from those or in addition to those they now know or believe to be true with respect to the Claim that is the subject of this release set forth hereinabove, and they expressly agree to assume the risk of possible discovery of additional or different facts, and agree that this Agreement shall be and remain effective in all respects regardless of such additional or different facts.  Further, the releasing Parties to this Agreement agree to waive and relinquish all rights and benefits they may have under Section 1542 of the California Civil Code and any related

11

rights under the laws of the states of Massachusetts, New Jersey or Minnesota.  California Civil Code Section 1542 reads as follows:

“ A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.”

Dataradio                                   BIO-key                                                        

10.Successor and Assigns.  This Agreement and the covenants and conditions contained herein shall apply to, be binding upon, and inure to the benefit of the respective representatives, assigns, successors, employees and insurers of the parties hereto; provided, however, BIO-key shall not assign any of its obligations under this Agreement without the prior written consent of Dataradio.

11.No Prior Assignments.  The Parties represent that there has been no assignment, sale, or transfer, by operation of law or otherwise of any claim, right or interest released and that each of the Parties has the authority and right to settle, compromise and release any claim, right or interest released.

12.Representations and Warranties.  Each Party represents and warrants to the other Party as follows:

A.This Agreement is the product of negotiation and preparation by and between each Party and their respective attorneys.  Therefore, the Parties acknowledge and agree that this Agreement shall not be deemed prepared or drafted by one Party or another and should be construed accordingly.

12

B.Neither Party has made any statement or representation regarding the facts relied upon in entering into this Agreement and the Parties do not rely upon statements, representations or comments of any of the Parties in executing this Agreement, or in making this settlement, except as expressly stated in this Agreement.  They further represent and warrant that the consideration recited in this Agreement is the sole and only consideration for this Agreement, and no representations, promises or inducements have been made by any Party or its officers, employees, agents or attorneys thereof other than those appearing in this Agreement.

C.Each Party has read this Agreement and understands its contents.

D.Each Party has full corporate power and authority to execute and deliver this Agreement, the Hamilton County Assignment and each of the Judgment Documents to which it is a party and to perform its obligations hereunder and thereunder.  The execution and delivery by each Party of this Agreement, the Hamilton County Assignment and each of the Judgment Documents to which it is a party have been duly and validly authorized by all necessary corporate action.  This Agreement, the Hamilton County Assignment and each of the Judgment Documents to which such Party is a party has been duly executed and delivered by such Party.  This Agreement, the Hamilton County Assignment and the Judgment Documents to which such Party is a party constitute the legal, valid and binding obligations of such Party, enforceable against such Party in accordance with its and their respective terms.  The persons who have executed this Agreement, the Hamilton County Assignment and the Judgment Documents on behalf of the Parties are duly authorized and have the full power and authority of the Parties to do so.

F.The Parties acknowledge and agree that this Agreement is entered into as

13

part of a compromise and settlement of disputed claims.  The Parties further acknowledge and agree that acceptance of the Agreement is not an admission of any facts, matter or things.  Neither this Agreement nor any of its terms shall be offered or received as evidence in any proceeding in any forum as an admission of any liability or wrongdoing on the part of any person released by this Agreement, except a proceeding related to this Agreement.

G.Dataradio represents and warrants to BIO-key that Dataradio owns all right, title and interest in and to the Claim, free and clear of any liens or other encumbrances, and that no other person or entity has any right (beneficial or otherwise) to any portion of the Claim or to make any other claim against BIO-key for any portion of the Balance.

13.Attorney’s Fees; Expert’s Fees; Costs.   In the event that any action, suit or other proceeding (including any and all appeals or petitions therefrom) is instituted to remedy, prevent or obtain relief from a breach of this Agreement, or arising out of or related to this Agreement, the prevailing Party shall recover all reasonable attorney’s and expert fees and costs in addition to any other relief to which that Party may be entitled.  Further, in the event any amendment of this Agreement, workout, restructuring or similar arrangement is initiated at the request of or on behalf of BIO-key, BIO-key shall promptly pay after demand any and all costs and expenses (including attorney’s fees) incurred by Dataradio in connection with such amendment, workout, restructuring or similar arrangement.

14.Confidentiality.  Except as provided herein and except in a confidential communication with such Party’s attorneys, such Party’s accountants, or its officers, directors, and affiliates, or as otherwise required by applicable law or by a court of competent jurisdiction, no Party nor any of such Party’s agents or representatives (including such Party’s attorneys) will

14

at any time publish, disseminate, or communicate to any third party, directly or indirectly, any information relating to the terms and conditions of this Agreement (including but not limited to any payments to be made pursuant to this Agreement).

15.Notices.  Unless otherwise expressly provided herein, any notices to be furnished under this Agreement will be sufficient if in writing and (i) hand delivered, (ii) sent by certified or registered mail, (iii) by nationally recognized overnight courier, (iv) by facsimile or (v) by e-mail, if notice is also contemporaneously sent by one of the other methods of delivery.  Notices sent pursuant to the provisions of this section shall be deemed delivered on the earlier of actual receipt or two (2) business days after transmittal.  All notices shall be addressed as follows:

If to Dataradio:
	Dataradio Corporation
	1401 North Rice Avenue
	Oxnard, California 93030
	Attn:  Rick Vitelle
	Telephone:  805-419-8344
	Facsimile:  805-482-5842
	E-mail:  rvitelle@calamp.com
	with a copy (which shall not constitute notice) to:
	Myers, Widders, Gibson, Jones & Schneider, LLP
	5425 Everglades Street
	Ventura, California 93003
	Attention: Erik B. Feingold, Esq.
	Facsimile: 805-650-5177
	E-mail: efeingold@mwgjs.com
If to BIO-key:
	BIO-key International, Inc.
	3349 Highway 138
	Building D, Suite B
	Wall, NJ 07719
	Attn:  Michael W. DePasquale

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Telephone:  732-359-1111

Facsimile:

E-Mail:  mike.depasquale@bio-key.com

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

Choate, Hall & Stewart LLP

Two International Place

Boston, Massachusetts 02110

Attention:  Brian J. Carr, Esq.

Facsimile: 617-248-4000

E-mail:  bcarr@choate.com

Either Dataradio or BIO-key may at any time change the address to which notices are to be given to it by notice to the other in accordance with the terms hereof.

16.Counterparts.  This Agreement may be executed in one or more counterparts, by either facsimile or scanned signatures, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

17.Independent Representation.  Each Party acknowledges that it has been represented by independent counsel of its own choosing throughout the negotiations which preceded the execution of this Agreement, and that this Agreement was executed with the consent and advice of such independent legal counsel.

18.Entire Agreement.  This Agreement and the Judgment Documents constitute the entire agreement, and supersede all prior written agreements, arrangements, communications and understandings and all prior and contemporaneous oral agreements, arrangements, communications and understandings among the Parties with respect to the subject matter of this Agreement and the Claim.

19.Amendment.  This Agreement may not be amended, modified or supplemented in any manner, whether by course of conduct or otherwise, except by an instrument in writing

16

signed on behalf of each Party and otherwise as expressly set forth herein.

20.Severability.  Whenever possible, each provision or portion of any provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or portion of any provision in such jurisdiction, and this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein.

21.Time of the Essence.  Time is of the essence with regard to all dates and time periods set forth or referred to in this Agreement.

22.Waiver.  No failure or delay of either Party in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such right or power, or any course of conduct, preclude any other or further exercise thereof or the exercise of any other right or power.  The rights and remedies of the Parties hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have hereunder.  Any agreement on the part of either Party to any such waiver shall be valid only if set forth in a written instrument executed and delivered by a duly authorized officer on behalf of such Party.

23.Further Assurances.  From time to time after the execution of this Agreement, and for no further consideration, each of the Parties shall execute, acknowledge and deliver such assignments, transfers, consents and other documents and instruments and take such other

17

actions as may be necessary or desirable to consummate and make effective the transactions contemplated by this Agreement.

[signature page follows]

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WHEREFORE, the Parties hereto have executed this Agreement as of the date first set forth above.

		BIO-KEY INTERNATIONAL, INC.
		By:	/s/ Michael W. DePasquale
		Name:
		Title:
		DATARADIO CORPORATION
		By:	/s/ Richard K. Vitelle
		Name:
		Title:
Acknowledged and agreed, solely for the purpose
of serving as the Escrow Agent in accordance with
Section 5 hereof:
MYERS, WIDDERS, GIBSON, JONES & SCHNEIDER, L.L.P.,
as Escrow Agent
By	/s/ Erik B. Feingold
	Erik B. Feingold

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EX-10.2

Exhibit 10.2

OFFICE LEASE AGREEMENT

300 Nickerson Road, Marlborough, Massachusetts

BETWEEN

NORMANDY NICKERSON ROAD, LLC, a Delaware limited liability company

(“LANDLORD”)

and

BIO-KEY INTERNATIONAL, INC., a Delaware corporation

(“TENANT”)

OFFICE LEASE AGREEMENT

THIS OFFICE LEASE AGREEMENT (the “Lease”) is made and entered into as of June 30, 2008, by and between NORMANDY NICKERSON ROAD, LLC, a Delaware limited liability company (“Landlord”) and BIO-KEY INTERNATIONAL, INC., a Delaware corporation (“Tenant”).  The following exhibits and attachments are incorporated into and made a part of the Lease: Exhibit A (Outline and Location of Premises), Exhibit B (Expenses and Taxes), Exhibit C (Intentionally Omitted), Exhibit D (Commencement Letter), Exhibit E (Building Rules and Regulations), Exhibit F (Landlord’s Work) and Exhibit G (Form of Letter of Credit).

1.Basic Lease Information.

1.1“Building” shall mean the building located at 300 Nickerson Road, Marlborough, Massachusetts 01752.  “Rentable Square Footage of the Building” is deemed to be 80,724 square feet.

1.2“Premises” shall mean the area shown on Exhibit A to this Lease.  The Premises is located on the first floor of the Building as shown on Exhibit A.  The “Rentable Square Footage of the Premises” is deemed to be 14,907 rentable square feet. Landlord and Tenant stipulate and agree that the Rentable Square Footage of the Building and the Rentable Square Footage of the Premises are correct.

1.3“Base Rent”:

Period or Months of Term	Monthly Base Rent
Lease Months 1 - 12	$	20,250.00
Lease Months 13 - 24	$	26,397.81
Lease Months 25 - 36	$	27,640.06

1.4“Tenant’s Pro Rata Share”: 18.5% for the Building and 2.3% for the Complex.  Tenant’s Pro Rata Share shall be adjusted for changes in the Rentable Square Footage of the Premises and/or the Rentable Square Footage of the Building and/or Complex, including, without limitation, changes which may result from any condemnation or other taking of a portion of the Building and/or Complex.

1.5“Base Year” for Taxes:  Fiscal Year (defined below) 2009 (i.e., July 1, 2008 to June 30, 2009); “Base Year” for Expenses (defined in Exhibit B):  calendar year 2009.

For purposes hereof, “Fiscal Year” shall mean the Base Year for Taxes and each period of July 1 to June 30 thereafter.

1.6“Term”: A period of thirty-six (36) Lease Months.  The Term shall commence on September 1, 2008 (the “Commencement Date”) and, unless terminated early in accordance with this Lease, end on the last day of the thirty-sixth (36^th) Lease Month following the Commencement Date (the “Termination Date”).  As used herein, the term

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“Lease Month” shall mean a calendar month (or, if the Commencement Date is not the first day of a calendar month, the first Lease Month shall be such partial calendar month in which the Commencement Date occurs plus the first full calendar month thereafter).

1.7“Complex”: Those certain parcels of land (approximately 85 acres) and the buildings, the parking areas and other improvements thereon, including the Building, collectively known as 100-700 Nickerson Road, Marlborough, Middlesex County, Massachusetts, also commonly known as Marlborough Technology Complex, as well as any additional buildings or amenities that may be constructed on the Complex property.

1.8“Security Deposit”:  $40,500.00, as more fully described in Section 6.

1.9Intentionally Omitted.

1.10“Broker”: Richards Barry Joyce & Partners.

1.11“Permitted Use”:  General office use with ancillary computer server rooms.

1.12“Notice Address(es)”:

Landlord:

Steve Smith

Normandy Real Estate Management

1776 On the Green

67 Park Place East

Morristown, New Jersey 07960

With a copy to:

Raymond P. Trevisan

Principal, General Counsel

Normandy Real Estate Partners

67 Park Place East

Morristown, New Jersey 07960

Tenant:

BIO-key International, Inc.

300 Nickerson Road

Marlborough, Massachusetts 01752

1.13“Business Day(s)” are Monday through Friday of each week, exclusive of New Year’s Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day

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and Christmas Day (“Holidays”).  Landlord may designate additional Holidays that are commonly recognized by other office buildings in the area where the Building is located.  “Building Service Hours” are 8:00 a.m. to 6:00 p.m. on Business Days and 9:00 a.m. to 1:00 p.m. on Saturdays (excluding Holidays).

2.Lease Grant.

The Premises are hereby leased to Tenant from Landlord, together with the right to use any portions of the Complex that are from time to time designated by Landlord for the common use of tenants and others, such as sidewalks, driveways, parking areas, common corridors, elevator foyers, common restrooms and lobby areas (the “Common Areas”).  Nothing contained herein shall affect Landlord’s right to add to, subtract from, or alter the Common Areas, including but not limited to making such changes in or to the Building and/or Complex and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators, stairways and other improvements thereof, as Landlord may deem necessary or desirable, so long as the same does not materially adversely affect Tenant’s access to or use of the Premises.

Landlord may adopt any name for the Building and/or Complex and Landlord reserves the right to change the name or address of the Building at any time.

Tenant shall have access to the Premises twenty-four (24) hours per day, seven (7) days per week.

3.Possession; Landlord’s Work.

3.1Tenant acknowledges that as of the date hereof, Tenant is currently in possession of the Premises pursuant to a sublease between Aether Systems, Inc., as sublessor, and Tenant, as sublessee.

3.2Subject to substantial completion of Landlord’s Work (as defined in Exhibit F), the Premises are accepted by Tenant in “as is” condition and configuration without any representations or warranties by Landlord except as expressly provided herein. By having already taken possession of the Premises as of the date hereof,  Tenant agrees that the Premises are in good order and satisfactory condition.  Tenant acknowledges that Landlord’s Work shall commence upon the Commencement Date and, subject to the provisions of Exhibit F, Landlord shall use commercially reasonable efforts to complete the Landlord’s Work as soon as reasonably possible.  Tenant shall reasonably cooperate with Landlord in Landlord’s performance of the Landlord’s Work (including without limitation internally relocating within the Premises, at Tenant’s sole cost, Tenant’s personnel and/or furniture, fixtures and equipment so as not to interfere with Landlord’s Work), Tenant hereby acknowledging that such work shall be performed on Business Days during Building Service Hours.

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4.Rent.

4.1Tenant shall pay Landlord, without any setoff or deduction, unless expressly set forth in this Lease, all Base Rent and Additional Rent due for the Term (collectively referred to as “Rent”). “Additional Rent” means all sums (exclusive of Base Rent) that Tenant is required to pay Landlord under this Lease. Tenant shall pay and be liable for all rental, sales and use taxes (but excluding income taxes), if any, imposed upon or measured by Rent.  Base Rent and recurring monthly charges of Additional Rent shall be due and payable in advance on the first day of each calendar month without notice or demand, provided that the installment of Base Rent for the first full calendar month of the Term, and the first monthly installment of Additional Rent for Expenses and Taxes, shall be payable upon the execution of this Lease by Tenant.  Unless otherwise specifically set forth herein, all other items of Rent shall be due and payable by Tenant on or before thirty (30) days after billing by Landlord.  Rent shall be made payable to the entity, and sent to the address, Landlord designates and shall be made by good and sufficient check or by other means acceptable to Landlord and initially shall be made as follows:

If by Regular Mail:	Normandy Nickerson Road, LLC
	P.O. Box 30930
	New York, New York 10087-0930
If by Overnight Mail/Courier:	JP Morgan Chase - Lockbox Processing
	Normandy Nickerson Road, LLC
	Lockbox 30930
	4 Chase Metrotech Center
	Ground Level Courier on Willoughby Street
	Brooklyn, NY 11245
If by Wire Transfer:	Normandy Nickerson Road, LLC
	Account No. 230460283
	ABA : 021000021
	Bank: JPMorgan Chase Bank
	401 Madison Avenue
	New York, NY 10017

Tenant shall pay Landlord an administration fee equal to 5% of all past due Rent that is not paid within five (5) days of the date when due.  In addition, past due Rent shall accrue interest at the lesser of 12% per annum or the maximum rate allowed by law from the due date until actually paid.  Landlord’s acceptance of less than the correct amount of Rent shall be considered a payment on account of the earliest Rent due. Rent for any partial month during the Term shall be prorated. No endorsement or statement on a check or letter accompanying payment shall be considered an accord and satisfaction.  Tenant’s covenant to pay Rent is independent of every other covenant in this Lease.

4.2Tenant shall pay Tenant’s Pro Rata Share of Taxes and Expenses in accordance with Exhibit B of this Lease.

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4.3Tenant waives all rights (i) to any abatement, suspension, deferment or reduction of or from Rent, and (ii) to quit, terminate or surrender this Lease or the Premises or any part thereof, except, in either case, as expressly provided herein.  Tenant hereby acknowledges and agrees that the obligations of Tenant hereunder shall be separate and independent covenants and agreements, that Rent shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to an express provision of this Lease.  Landlord and Tenant each acknowledges and agrees that the independent nature of the obligations of Tenant hereunder represents fair, reasonable and accepted commercial practice with respect to the type of property subject to this Lease, and that this agreement is the product of free and informed negotiation during which both Landlord and Tenant were represented by counsel skilled in negotiating and drafting commercial leases in Massachusetts, and that the acknowledgements and agreements contained herein are made with full knowledge of the holding in Wesson v. Leone Enterprises, Inc., 437 Mass. 708 (2002).  Such acknowledgements, agreements and waivers by Tenant are a material inducement to Landlord entering into this Lease.

5.Compliance with Laws; Use.

The Premises shall be used for the Permitted Use and for no other use whatsoever. Tenant shall comply with all statutes, codes, ordinances, orders, rules and regulations of any municipal or governmental entity whether in effect now or later, including the Americans with Disabilities Act (“Law(s)”), regarding the operation of Tenant’s business and the use, condition, configuration and occupancy of the Premises. In addition, Tenant shall, at its sole cost and expense, promptly comply with any Laws that relate to the base building to the extent such obligations are triggered by Tenant’s use of the Premises, other than for the Permitted Use, or Alterations or improvements in the Premises performed or requested by Tenant. Tenant shall promptly provide Landlord with copies of any notices it receives regarding an alleged violation of Law involving the Premises.  Tenant shall comply with the rules and regulations of the Building attached as Exhibit E and such other reasonable rules and regulations adopted by Landlord from time to time, including rules and regulations for the performance of Alterations (defined below).  Landlord agrees that such rules and regulations shall be established and applied by Landlord in a non-discriminatory fashion, such that all rules and regulations shall be generally applicable to all other tenants of the Building of a similar nature of Tenant.  Landlord makes no warranty or representation that the Building and/or Premises are suitable for Tenant’s use, including without limitation the Permitted Use.

6.Security Deposit.

The Security Deposit shall be delivered to Landlord upon the execution of this Lease by Tenant and held by Landlord without liability for interest (unless required by Law) as security for the performance of Tenant’s obligations.  Unless otherwise required by Law, the Security Deposit may be commingled with Landlord’s general accounts.  The Security Deposit is not an advance payment of Rent or a measure of damages.  Landlord may use all or a portion of the Security Deposit to satisfy past-due Rent or to cure any Default (defined below) by Tenant.  If Landlord uses any portion of the Security Deposit,

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Tenant shall, within ten (10) days after demand, restore the Security Deposit to its original amount. Landlord shall return any unapplied portion of the Security Deposit to Tenant within 45 days after the later to occur of: (a) determination of the final Rent due from Tenant; or (b) the later to occur of the Termination Date or the date Tenant surrenders the Premises to Landlord in compliance with Section 25.  Landlord may assign the Security Deposit to a successor or transferee and, following the assignment, Landlord shall have no further liability for the return of the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts.

The Security Deposit shall be in the form of an irrevocable letter of credit (the “Letter of Credit”), which Letter of Credit shall:  (a) be in the amount of $40,500.00; (b) be issued on the form attached hereto as Exhibit G; (c) name Landlord as its beneficiary; and (d) be drawn on an FDIC insured financial institution satisfactory to the Landlord.  The Letter of Credit (and any renewals or replacements thereof) shall be for a term of not less than one (1) year.  Tenant agrees that it shall from time to time, as necessary, whether as a result of a draw on the Letter of Credit by Landlord pursuant to the terms hereof or as a result of the expiration of the Letter of Credit then in effect, renew or replace the original and any subsequent Letter of Credit so that a Letter of Credit, in the amount required hereunder, is in effect until a date which is at least sixty (60) days after the Termination Date of the Lease.  If Tenant fails to furnish such renewal or replacement at least sixty (60) days prior to the stated expiration date of the Letter of Credit then held by Landlord, Landlord may draw upon such Letter of Credit and hold the proceeds thereof (and such proceeds need not be segregated) as a Security Deposit pursuant to the terms of this Section 6.  Any renewal or replacement of the original or any subsequent Letter of Credit shall meet the requirements for the original Letter of Credit as set forth above, except that such replacement or renewal shall be issued by a national bank satisfactory to Landlord at the time of the issuance thereof.

If Landlord draws on the Letter of Credit as permitted in this Lease or the Letter of Credit, then, promptly upon demand of Landlord, Tenant shall restore the amount available under the Letter of Credit to its original amount by providing Landlord with an amendment to the Letter of Credit evidencing that the amount available under the Letter of Credit has been restored to its original amount.

7.Building Services.

7.1Landlord shall furnish Tenant with the following services: (a) water for use in the base building lavatories; (b) customary heat and air conditioning in season during the Building Service Hours; provided that Tenant may receive HVAC service during hours other than the Building Service Hours by paying Landlord’s then standard charge for additional HVAC service so long as Tenant requests same by written notice to Landlord not later than 12:00 noon on the Business Day preceding the day of such overtime usage; (c) standard janitorial service on Business Days; (d) Electricity in accordance with the terms and conditions in Section 7.2; (d) maintenance services as described in Section 9.2 below; and (f) such other services as Landlord reasonably determines are necessary or appropriate for the Building or Complex.

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7.2Electricity shall be distributed to the Premises either by the electric utility company selected by Landlord to provide electricity service for the Building and/or the Complex, or, at Landlord’s option, by Landlord; and Landlord shall permit Landlord’s wires and conduits, to the extent available, suitable and safely capable, to be used for such distribution. If and so long as Landlord is distributing electricity to the Premises, Tenant shall obtain all of its electricity from Landlord and shall pay all of Landlord’s charges, which charges shall be based, at Landlord’s option, either on meter readings or on Landlord’s reasonable estimate of Tenant’s electrical usage or on Tenant’s pro rata share of all space, including the Premises, which is commonly metered with the Premises.  In calculating such charges, there shall be included all costs to Landlord to obtain electric service to the Building and/or the Complex, including all costs of whatever nature incurred in connection with entering agreements for obtaining such service from utility suppliers.  Initially, such charges will be based on Landlord’s estimated cost of $1.75 per annum per rentable square foot of floor area in the Premises ($2,173.94 per month).  If the electric utility company selected by Landlord to provide electricity service for the Building and/or the Complex is distributing electricity to the Premises, Landlord may elect to require Tenant, at its cost, to make all necessary arrangements with such electric utility company for metering and paying for electric current furnished to the Premises. All electricity used during the performance of janitorial service, or the making of any alterations or repairs in or to the Premises, or the operation of any special air conditioning system serving the Premises, shall be paid by Tenant.

Landlord reserves the right at any time and from time to time before or during the Term to with an electric service provider (“Electric Service Provider”) of its choice to provide electricity service for the Building.  Tenant shall cooperate with Landlord and the Electric Service Provider at all times and, as reasonably necessary, shall allow Landlord and the Electric Service Provider reasonable access to the Building’s and Complex’s electric lines, feeders, risers, wiring and other machinery within the Premises.

Without the consent of Landlord, Tenant’s use of electrical service shall not exceed, either in voltage, rated capacity, use beyond the Building Service Hours or overall load, that which Landlord reasonably deems to be standard for the Building. Landlord shall have the right to measure electrical usage by commonly accepted methods. If it is determined that Tenant is using excess electricity, Tenant shall pay Landlord for the cost of such excess electrical usage as Additional Rent. All electricity used during the performance of janitorial service, or the making of any alterations or repairs in or to the Premises, or the operation of any special air conditioning system serving the Premises, shall be paid by Tenant.

7.3Landlord’s failure to furnish, or any interruption, diminishment or termination of services due to the application of Laws, the failure of any equipment, the performance of repairs, improvements or alterations, utility interruptions or the occurrence of an event of Force Majeure (defined below) (collectively a “Service Failure”) shall not render Landlord liable to Tenant, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement.  Notwithstanding the foregoing, in the event a Service Failure that is within the reasonable

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control of Landlord continues for a period in excess of five (5) consecutive business days, Tenant’s Base Rent shall abate on a day-by-day basis in proportion to the portion of the Premises that Tenant is unable to use for the Permitted Use.  The foregoing rent abatement shall be the Tenant’s sole remedy for any interruption of Tenant’s business operations due to such Service Failure.

8.Leasehold Improvements.

All improvements in and to the Premises, including any Alterations (collectively, “Leasehold Improvements”) shall remain upon the Premises at the end of the Term without compensation to Tenant.  Landlord, however, by written notice to Tenant at least forty-five (45) days prior to the Termination Date, may require Tenant, at its expense, to remove (a) any Cable (defined below) installed by or for the benefit of Tenant, and (b) any Alterations (defined below) that, in Landlord’s reasonable judgment, are of a nature that would require removal and repair costs that are materially in excess of the removal and repair costs associated with standard office improvements (collectively referred to as “Required Removables”).  Required Removables shall include, without limitation, internal stairways, raised floors, personal restrooms and showers, vaults, rolling file systems and structural alterations and modifications. The designated Required Removables shall be removed by Tenant before the Termination Date. Tenant shall repair damage caused by the installation or removal of Required Removables.  If Tenant fails to perform its obligations in a timely manner, Landlord may perform such work at Tenant’s expense. Tenant, at the time it requests approval for a proposed Alteration, may request in writing that Landlord advise Tenant whether the Alteration or any portion of the Alteration is a Required Removable.  In addition, Tenant shall be entitled to remove all articles of personal property and all machinery, equipment and furniture owned and installed by Tenant; provided that Tenant shall repair damage caused by the removal of such items.

9.Repairs and Alterations.

9.1Tenant shall periodically inspect the Premises to identify any conditions that are dangerous or in need of maintenance or repair.  Tenant shall promptly provide Landlord with notice of any such conditions. Tenant shall, at its sole cost and expense, perform all maintenance and repairs to the Premises that are not Landlord’s express responsibility under this Lease, and keep the Premises in good condition and repair, reasonable wear and tear and damage by fire or other casualty and as a consequence of the exercise of the power of eminent domain excepted. Tenant’s repair and maintenance obligations include, without limitation, repairs to: (a) floor covering; (b) interior partitions; (c) doors; (d) the interior side of demising walls; (e) electronic, phone and data cabling and related equipment that is installed by or for the exclusive benefit of Tenant (collectively, “Cable”); (f) supplemental air conditioning units, kitchens, hot water heaters, plumbing, and similar facilities exclusively serving Tenant; and (g) Alterations. To the extent Landlord is not reimbursed by insurance proceeds, Tenant shall reimburse Landlord for the cost of repairing damage to the Building caused by the acts of Tenant, Tenant Related Parties and their respective contractors and vendors. If Tenant fails to make any repairs to the Premises for more than fifteen (15) days after notice from Landlord (although notice

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shall not be required in an emergency), Landlord may make the repairs, and Tenant shall pay the reasonable cost of the repairs, together with an administrative charge in an amount equal to 5% of the cost of such repairs.  “Tenant Related Parties” shall mean Tenant’s officers, directors, shareholders, employees and agents.

9.2Landlord shall keep and maintain in good repair and working order, in a manner generally commensurate with first class office buildings located in the suburban metropolitan Boston area and perform maintenance upon (a) structural elements of the Building; (b) mechanical (including HVAC), electrical, plumbing and fire/life safety systems serving the Building in general; (c) Common Areas; (d) roof of the Building; (e) exterior windows of the Building; and (f) elevators serving the Building. Landlord shall promptly make repairs for which Landlord is responsible.

9.3Tenant shall not make alterations, repairs, additions or improvements or install any Cable (collectively referred to as “Alterations”) without first obtaining the written consent of Landlord in each instance. However, Landlord’s consent shall not be required for any Alteration that satisfies all of the following criteria (a “Cosmetic Alteration”):  (a) is of a cosmetic nature such as painting, wallpapering, hanging pictures and installing carpeting; (b) is not visible from the exterior of the Premises or Building; (c) will not affect the Base Building; and (d) does not require work to be performed inside the walls, below the floor, or above the ceiling of the Premises and (e) the cost of such work does not exceed $25,000.  Cosmetic Alterations shall be subject to all the other provisions of this Section 9.3.  Prior to starting any Alteration work, Tenant shall furnish Landlord with plans and specifications; names of contractors reasonably acceptable to Landlord (provided that Landlord may designate specific contractors with respect to base building work); required permits and approvals; evidence of contractor’s and subcontractor’s insurance in amounts reasonably required by Landlord and naming Landlord as an additional insured; and any security for performance in amounts reasonably required by Landlord.  Changes to the plans and specifications must also be submitted to Landlord for its approval. Alterations shall be constructed in a good and workmanlike manner using new materials of a quality reasonably approved by Landlord but in all instances at least equal to the then current quality of materials in the Premises. Tenant shall reimburse Landlord for any sums paid by Landlord for third party examination of Tenant’s plans for non-Cosmetic Alterations.  In addition, Tenant shall pay Landlord, as Additional Rent, a fee for Landlord’s oversight and coordination of any Alterations other than Cosmetic Alterations equal to 5% of the cost of the Alterations (excluding the Landlord Work set forth in Exhibit F except for any Additional Construction Cost as defined in Exhibit F).  Upon completion, Tenant shall furnish “as-built” plans for all Alterations other than Cosmetic Alterations, completion affidavits and full and final lien waivers. Landlord’s approval of an Alteration shall not be deemed a representation by Landlord that the Alteration complies with Law.  If at any time construction by or on behalf of Tenant shall cause disharmony, interference or union disputes of any nature whatsoever, whether with contractors of the Landlord and/or other tenants or occupants of the Building, Landlord reserves the right, without any liability to Landlord whatsoever, to immediately halt such construction and/or bar any offending contractors and/or subcontractors from the Building until such disharmony, interference or union disputes may be resolved.  Notwithstanding anything to the contrary contained

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herein, Tenant shall be entitled to replace rugs, and repaint and patch walls, in the Premises without Landlord’s consent or the prior submission of plans and specifications.

10.Entry by Landlord.

Landlord may enter the Premises to inspect, show or clean the Premises or to perform or facilitate the performance of repairs, alterations or additions to the Premises or any portion of the Building (including for the purpose of checking, calibrating, adjusting and balancing controls and other parts of the Building’s systems).  Except in emergencies or to provide Building services, Landlord shall provide Tenant with reasonable prior verbal notice of entry and shall use reasonable efforts to minimize any interference with Tenant’s use of the Premises.  If reasonably necessary, Landlord may temporarily close all or a portion of the Premises to perform repairs, alterations and additions.  However, except in emergencies, Landlord will not close the Premises if the work can reasonably be completed on weekends and after Building Service Hours.  Entry by Landlord shall not constitute a constructive eviction or entitle Tenant to an abatement or reduction of Rent.

11.Assignment and Subletting.

11.1Except in connection with a Permitted Transfer (defined below), Tenant shall not assign, sublease, transfer or encumber any interest in this Lease or allow any third party to use any portion of the Premises (collectively or individually, a “Transfer”) without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed if Landlord does not exercise its recapture rights under Section 11.2.  If the entity which controls the voting shares/rights of Tenant changes at any time, such change of ownership or control shall constitute a Transfer unless Tenant is an entity whose outstanding stock is listed on a recognized securities exchange or if at least 80% of its voting stock is owned by another entity, the voting stock of which is so listed.  Any attempted Transfer in violation of this Section is voidable by Landlord. In no event shall any Transfer, including a Permitted Transfer, release or relieve Tenant from any obligation under this Lease.   Notwithstanding the foregoing, in the event a Default exists either at the time Tenant requests consent for such sublease or assignment or at the commencement of such sublease or assignment (including without limitation a Permitted Transfer), Landlord may, at its sole discretion, refuse consent to such assignment or sublease and/or declare such assignment or sublease void and without force or effect.  Tenant shall not be entitled to receive monetary damages based upon a claim that Landlord unreasonably withheld its consent to a proposed transfer and Tenant’s sole remedy shall be an action to enforce any such provision through specific performance or declaratory judgment.

11.2Tenant shall provide Landlord with financial statements for the proposed transferee, a fully executed copy of the proposed assignment, sublease or other Transfer documentation and such other information as Landlord may reasonably request. Within fifteen (15) Business Days after receipt of the required information and documentation, Landlord shall either: (a) consent to the Transfer by execution of a consent agreement in a form reasonably designated by Landlord; (b) reasonably refuse to consent to the

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Transfer in writing; or (c) recapture the portion of the Premises that Tenant is proposing to Transfer; provided, however, Tenant may rescind its proposal to assign, sublease or otherwise Transfer and thereby nullify Landlord’s recapture of the portion of the Premises being transferred by giving written notice to Landlord within three (3) business days after receiving Landlord’s notice of recapture.  If Landlord exercises its right to recapture, this Lease shall automatically be amended (or terminated if the entire Premises is being assigned or sublet) to delete the applicable portion of the Premises effective on the proposed effective date of the Transfer.  Tenant shall pay to Landlord, as Additional Rent, a review fee of $1,500.00 for Landlord’s review of any Permitted Transfer or requested Transfer.

11.3Tenant shall pay Landlord, as Additional Rent, 50% of all rent and other consideration which Tenant receives as a result of a Transfer that is in excess of the Rent payable to Landlord for the portion of the Premises and Term covered by the Transfer.  Tenant shall pay Landlord for Landlord’s share of the excess within thirty (30) days after Tenant’s receipt of the excess.  Tenant may deduct from the excess, on a straight-line basis, all reasonable and customary expenses directly incurred by Tenant attributable to the Transfer including leasing commissions (but excluding tenant improvement allowances or other incentives).  If Tenant is in Default, Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shall receive a credit against Rent in the amount of Tenant’s share of payments received by Landlord.

11.4Tenant may assign this Lease to a successor to Tenant by purchase, merger, consolidation or reorganization (an “Ownership Change”) or assign this Lease or sublet all or a portion of the Premises to an Affiliate without the consent of Landlord, provided that all of the following conditions are satisfied (a “Permitted Transfer”):  (a) Tenant is not in Default; (b) in the event of an Ownership Change, Tenant’s successor shall own substantially all of the assets of Tenant and have a net worth which is at least equal to Tenant’s net worth as of the day prior to the proposed Ownership Change; (c) the use is only for the Permitted Use; and (d) Tenant shall give Landlord written notice at least ten (10) days prior to the effective date of the Permitted Transfer. Tenant’s notice to Landlord shall include information and documentation evidencing the Permitted Transfer and showing that each of the above conditions has been satisfied.  If requested by Landlord, Tenant’s successor shall sign a commercially reasonable form of assumption agreement. “Affiliate” shall mean an entity controlled by, controlling or under common control with Tenant (for such period of time as such entity continues to be controlled by, controlling or under common control with Tenant, it being agreed that the subsequent sale or transfer of stock resulting in a change in voting control, or any other transaction(s) having the overall effect that such entity ceases to be controlled by, controlling or under common control with Tenant, shall be treated as if such sale or transfer or transaction(s) were, for all purposes, an assignment of this Lease governed by the provisions of this Section).

12.Liens.

Tenant shall not permit mechanics’ or other liens to be placed upon the Complex, Premises or Tenant’s leasehold interest in connection with any work or service done or

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purportedly done by or for the benefit of Tenant or its transferees.  Tenant shall give Landlord notice at least fifteen (15) days prior to the commencement of any work in the Premises to afford Landlord the opportunity, where applicable, to post and record notices of non-responsibility. Tenant shall immediately fully discharge any lien or like filing, including any notice of contract, by settlement, by bonding or by insuring over the lien in the manner prescribed by the applicable lien Law.  If Tenant fails to do so, such failure shall be a default hereunder and Landlord may bond, insure over or otherwise discharge the lien.  Tenant shall reimburse Landlord for any amount paid by Landlord, including, without limitation, reasonable attorneys’ fees.  Landlord shall have the right to require Tenant to post a performance or payment bond in connection with any work or service done or purportedly done by or for the benefit of Tenant.  Tenant acknowledges and agrees that all such work or service is being performed for the sole benefit of Tenant and not for the benefit of Landlord.

13.Indemnity and Waiver of Claims.

Except to the extent caused by the gross negligence or willful misconduct of Landlord or any Landlord Related Parties, Tenant hereby waives all claims against and releases Landlord and its trustees, members, principals, beneficiaries, partners, officers, directors, employees, Mortgagees (defined below) and agents (the “Landlord Related Parties”) from all claims for any injury to or death of persons, damage to property or business loss in any manner related to (a) Force Majeure, (b) acts of third parties, (c) the bursting or leaking of any tank, water closet, drain or other pipe, (d) the inadequacy or failure of any security services, personnel or equipment, or (e) any matter not within the reasonable control of Landlord.  In addition to the foregoing Tenant agrees that Landlord shall have no responsibility or liability whatsoever for any loss or damage, however caused, to furnishings, fixtures, equipment, or other personal property of Tenant or of any persons claiming by, through, or under Tenant. Except to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties, Tenant shall indemnify, defend and hold Landlord and Landlord Related Parties harmless against and from all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys’ fees and other professional fees (if and to the extent permitted by Law) (collectively referred to as “Losses”), which may be imposed upon, incurred by or asserted against Landlord or any of the Landlord Related Parties by any third party and arising out of or in connection with any damage or injury occurring in the Premises or any acts or omissions (including violations of Law) of Tenant, the Tenant Related Parties or any of Tenant’s transferees, contractors or licensees.

14.Insurance.

14.1Tenant shall maintain the following insurance (“Tenant’s Insurance”):  (a) Commercial General Liability Insurance applicable to the Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of $3,000,000.00; (b)  Property/Business Interruption Insurance written on an All Risk or Special Perils form, with coverage for broad form water damage, at replacement cost value and with a replacement cost endorsement covering all of Tenant’s business and trade fixtures,

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equipment, movable partitions, furniture, merchandise and other personal property within the Premises (“Tenant’s Property”) and any Leasehold Improvements performed by or for the benefit of Tenant; (c) Workers’ Compensation Insurance in amounts required by Law; and (d) Employers Liability Coverage of at least $1,000,000.00 per occurrence.  Any company writing Tenant’s Insurance shall have an A.M. Best rating of not less than A-VIII.  All Commercial General Liability Insurance policies shall name as additional insureds Landlord (or its successors and assignees), the holder(s) of any mortgage(s) encumbering the Premises, the managing agent for the Building (or any successor), and their respective members, principals, beneficiaries, partners, officers, directors, employees, and agents, and other designees of Landlord and its successors as the interest of such designees shall appear. All policies of Tenant’s Insurance shall contain endorsements that the insurer(s) shall give Landlord and its designees at least thirty (30) days’ advance written notice of any cancellation, termination, material change or lapse of insurance. Tenant shall provide Landlord with a certificate of insurance evidencing Tenant’s Insurance prior to the Commencement Date, and thereafter as necessary to assure that Landlord always has current certificates evidencing Tenant’s Insurance. Tenant’s insurance requirements stipulated herein are based upon current industry standards, and Landlord reserves the right to require additional coverage and/or to increase limits as industry standards change and/or as required by Landlord’s mortgagees from time to time.  So long as the same is available at commercially reasonable rates, Landlord shall maintain so called All Risk property insurance on the Building at replacement cost value as reasonably estimated by Landlord.

14.2Tenant shall not store any article or do anything in or about the Premises which may be prohibited by Landlord’s insurance policies or any endorsements or forms attached thereto, or which will increase any insurance rates and premiums on the Premises or the Building.  Tenant shall pay within ten (10) days of written demand any increase in premiums for Landlord’s insurance that may be charged on such insurance carried by Landlord resulting from Tenant’s use and occupancy of the Premises or the Building, whether or not Landlord has consented to the same.  In determining whether increased premiums are the result of Tenant’s use, occupancy or vacancy of the Premises, a schedule issued by the organization making the fire insurance, extended coverage, vandalism and malicious mischief, special extended coverage or any all-risk insurance rates for said Premises or any rule books issued by the rating organization or similar bodies or by rating procedures or rules of Landlord’s insurance companies shall be conclusive evidence of the several items and charges which make up the insurance rates on the Premises and the Building.

15.Subrogation.

Landlord and Tenant hereby waive and shall cause their respective insurance carriers to waive any and all rights of recovery, claims, actions or causes of action against the other for any loss or damage with respect to Tenant’s Property, Leasehold Improvements, the Building, the Premises, or any contents thereof, including rights, claims, actions and causes of action based on negligence, which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by insurance.

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16.Casualty Damage.

16.1If all or any portion of the Premises becomes untenantable by fire or other casualty to the Premises (collectively a “Casualty”), Landlord, with reasonable promptness, shall cause a general contractor selected by Landlord to provide Landlord and Tenant with a written estimate of the amount of time required using standard working methods to Substantially Complete the repair and restoration of the Premises and any Common Areas necessary to provide access to the Premises (“Completion Estimate”).  If the Completion Estimate indicates that the Premises or any Common Areas necessary to provide access to the Premises cannot be made tenantable within 270 days from the date the repair is started, then either party shall have the right to terminate this Lease upon written notice to the other within ten (10) days after receipt of the Completion Estimate.  Tenant, however, shall not have the right to terminate this Lease if the Casualty was caused by the negligence or intentional misconduct of Tenant or any Tenant Related Parties. In addition, Landlord, by notice to Tenant within ninety (90) days after the date of the Casualty, shall have the right to terminate this Lease if:  (1) the Premises have been materially damaged and there is less than two (2) years of the Term remaining on the date of the Casualty; (2) any Mortgagee requires that the insurance proceeds be applied to the payment of the mortgage debt; or (3) a material uninsured loss to the Building occurs.

16.2If this Lease is not terminated, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord’s reasonable control, restore the Premises and Common Areas. Such restoration shall be to substantially the same condition that existed prior to the Casualty to the extent of insurance proceeds received by Landlord, except for modifications required by Law or any other modifications to the Common Areas deemed desirable by Landlord. Upon notice from Landlord, Tenant shall assign to Landlord (or to any party designated by Landlord) all property insurance proceeds payable to Tenant under Tenant’s Insurance with respect to any Leasehold Improvements performed by or for the benefit of Tenant; provided if the estimated cost to repair such Leasehold Improvements exceeds the amount of insurance proceeds received by Landlord from Tenant’s insurance carrier, the excess cost of such repairs shall be paid by Tenant to Landlord prior to Landlord’s commencement of repairs.  Within fifteen (15) days of demand, Tenant shall also pay Landlord for any additional excess costs that are determined during the performance of the repairs. Landlord shall not be liable for any inconvenience to Tenant, or injury to Tenant’s business resulting in any way from the Casualty or the repair thereof.  Provided that Tenant is not in Default, during any period of time that all or a material portion of the Premises is rendered untenantable as a result of a Casualty, the Rent shall abate for the portion of the Premises that is untenantable and not used by Tenant.  If for any reason the work to repair or rebuild the Premises following a Casualty is not substantially completed within 270 days after the casualty, Tenant shall have the right to terminate this Lease by giving Landlord thirty (30) days prior written notice of Tenant’s election so to do after the expiration of such 270-day period, whereupon this Lease shall terminate on the date of such notice with the same force and effect as if such date were the date originally established as the expiration date hereof; provided that if Landlord substantially

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completes such work prior to the end of such 30-day period, such election to terminate shall be void and of no force or effect.

17.Condemnation.

Either party may terminate this Lease if any material part of the Premises is taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a “Taking”).  For the purposes of this Section, a “material” part of the Premises shall be over 30% of the Premises.  Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or the Complex which would have a material adverse effect on Landlord’s ability to profitably operate the remainder of the Building.  The terminating party shall provide written notice of termination to the other party within forty-five (45) days after it first receives notice of the Taking.  The termination shall be effective on the date the physical taking occurs.  If this Lease is not terminated, Base Rent and Tenant’s Pro Rata Share shall be appropriately adjusted to account for any reduction in the square footage of the Building or Premises. All compensation awarded for a Taking shall be the property of Landlord.  The right to receive compensation or proceeds are expressly waived by Tenant, however, Tenant may file a separate claim for Tenant’s Property and Tenant’s reasonable relocation expenses, provided the filing of the claim does not diminish the amount of Landlord’s award.  If only a part of the Premises is subject to a Taking and this Lease is not terminated, Landlord, with reasonable diligence, will restore the remaining portion of the Premises as nearly as practicable to the condition immediately prior to the Taking.

18.Events of Default.

Each of the following occurrences shall be a “Default”: (a) Tenant’s failure to pay any portion of Rent when due, if the failure continues for five (5) days after written notice to Tenant (a “Monetary Default”); (b) Tenant’s failure (other than a Monetary Default) to comply with any term, provision, condition or covenant of this Lease, if the failure is not cured within thirty (30) days after written notice to Tenant, provided, however, if Tenant’s failure to comply cannot reasonably be cured within 30 days, Tenant shall be allowed additional time (not to exceed 60 days) as is reasonably necessary to cure the failure so long as Tenant begins the cure within 10 days after such notice to Tenant and diligently pursues the cure to completion; (c) Tenant or any guarantor of the Lease becomes insolvent, makes a transfer in fraud of creditors, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts when due or forfeits or loses its right to conduct business; (d) the leasehold estate is taken by process or operation of Law; (e) in the case of any ground floor Tenant, Tenant abandons the Premises (it being understood for purposes of this Lease that even if Tenant vacates the Premises no abandonment will be created provided that the Tenant complies with its other obligations under this Lease); (f) Tenant is in default beyond any notice and cure period under any other lease or agreement with Landlord at the Building or Complex; or (g) Tenant is in default under Sections 11.1 or 12 above. If Landlord provides Tenant with notice of Tenant’s failure to comply with any specific provision of this Lease on three (3) separate occasions during any 12-month period, Tenant’s subsequent violation of such provision shall, at Landlord’s option, be an incurable Default by Tenant. All

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notices sent under this Section shall be in satisfaction of, and not in addition to, notice required by Law.

19.Remedies.

19.1Upon Default, Landlord shall have the right to pursue any one or more of the following remedies:

(a)Terminate this Lease, in which case Tenant shall immediately surrender the Premises to Landlord.  If Tenant fails to surrender the Premises, Landlord, in compliance with Law, may enter upon and take possession of the Premises and remove Tenant, Tenant’s Property and any party occupying the Premises. Tenant shall pay Landlord, on demand, all past due Rent and other losses and damages Landlord suffers as a result of Tenant’s Default, including, without limitation, all Costs of Reletting (defined below) and any deficiency that may arise from reletting or the failure to relet the Premises.  “Costs of Reletting” shall include all reasonable costs and expenses incurred by Landlord in reletting or attempting to relet the Premises, including, without limitation, legal fees, brokerage commissions, the cost of alterations and the value of other concessions or allowances granted to a new tenant.

(b)Terminate Tenant’s right to possession of the Premises and, in compliance with Law, remove Tenant, Tenant’s Property and any parties occupying the Premises.  Landlord may (but, except as expressly provided below, shall not be obligated to) relet all or any part of the Premises, without notice to Tenant, for such period of time and on such terms and conditions (which may include concessions, free rent and work allowances) as Landlord in its absolute discretion shall determine.  Landlord may collect and receive all rents and other income from the reletting.  Tenant shall pay Landlord on demand all past due Rent, all Costs of Reletting and any deficiency arising from the reletting or failure to relet the Premises. The re-entry or taking of possession of the Premises shall not be construed as an election by Landlord to terminate this Lease.  Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord in its sole discretion may determine (including a term different from the Term, rental concessions, and alterations to, and improvement of, the Premises); however, Landlord shall not be obligated to relet the Premises before leasing other portions of the Building.  Landlord shall not be liable for, nor shall Tenant’s obligations hereunder be diminished because of, Landlord’s failure to relet the Premises or to collect rent due for such reletting.

19.2In lieu of calculating damages under Section 19.1, Landlord may elect to receive as damages the sum of (a) all Rent accrued through the date of termination of this Lease or Tenant’s right to possession, and (b) an amount equal to the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value, minus the then present fair rental value of the Premises for the remainder of the Term, similarly discounted, after deducting all anticipated Costs of Reletting. If Tenant is in Default of any of its non-monetary obligations under the Lease, Landlord shall have the right to perform such obligations.  Tenant shall reimburse Landlord for the cost of such performance upon demand together with an administrative charge equal to 10% of the cost of the work performed by Landlord. The repossession or re-entering of all or any

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part of the Premises shall not relieve Tenant of its liabilities and obligations under this Lease.  No right or remedy of Landlord shall be exclusive of any other right or remedy. Each right and remedy shall be cumulative and in addition to any other right and remedy now or subsequently available to Landlord at Law or in equity.

20.Limitation of Liability.

NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE PROPERTY.  TENANT SHALL LOOK SOLELY TO LANDLORD’S INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST LANDLORD OR ANY LANDLORD RELATED PARTY. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY, AND IN NO EVENT SHALL LANDLORD OR ANY LANDLORD RELATED PARTY BE LIABLE TO TENANT FOR ANY LOST PROFIT, DAMAGE TO OR LOSS OF BUSINESS OR ANY FORM OF SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGE.  BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES (DEFINED IN SECTION 23 BELOW), NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT. WITHOUT LIMITING THE FOREGOING, IN NO EVENT SHALL LANDLORD OR ANY MORTGAGEES OR LANDLORD RELATED PARTIES EVER BE LIABLE FOR ANY CONSEQUENTIAL OR INCIDENTAL DAMAGES OR ANY LOST PROFITS OF TENANT.

LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT’S INTENDED COMMERCIAL PURPOSE, AND TENANT’S OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED.

21.Relocation.

Landlord shall have a one-time right to relocate Tenant from the Premises to space of reasonably comparable size and utility within the Complex and with substantially equivalent (but not lesser) quality of finishes to that of the Premises (“Relocation Space”) upon ninety (90) days’ prior written notice to Tenant.  From and after the date of the relocation, the Base Rent and Tenant’s Pro Rata Share shall be adjusted downward, if applicable, but in no event upward, based on the rentable square footage of the Relocation Space.  Landlord shall, at Landlord’s sole cost and expense, cause Tenant’s relocation to the Relocation Space (including the moving to, setting up, connecting and

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testing as to operation in the Relocation Space, at Tenant’s reasonable direction, of all of Tenant’s furniture, fixtures and equipment, including but not limited to, Tenant’s personal property and cabling, which cabling shall be substantially similar to that of the original Premises) to commence and be completed over a one-weekend period (or such longer period as is reasonably required to complete the same subject to Tenant’s reasonable cooperation, at no cost to Tenant, with Landlord to effect such relocation; i.e. Tenant’s cooperation will be required to relocate items such as Tenant’s server room).  Landlord shall reimburse Tenant for Tenant’s actual, out-of-pocket costs of Tenant’s replacing of its stationery, business cards and similar items as is reasonably necessary to reflect Tenant’s relocation in the Relocation Space. Landlord shall coordinate with Tenant the dates and times for Tenant’s relocation to the Relocation Space so as to minimize any downtime of Tenant caused by such relocation provided that the relocation occurs within the aforesaid 90-day period.  Notwithstanding anything contained herein to the contrary, Landlord shall not have the right to relocate Tenant during the last six (6) months of the Term.

22.Holding Over.

If Tenant fails to surrender all or any part of the Premises at the termination of this Lease, occupancy of the Premises after termination shall be that of a tenancy at sufferance.  Tenant’s occupancy shall be subject to all the terms and provisions of this Lease, and Tenant shall pay an amount (on a per month basis without reduction for partial months during the holdover) equal to 150% of the sum of the Base Rent and Additional Rent due for the period immediately preceding the holdover for the first thirty (30) days of the holdover and thereafter 200% of the sum of the Base Rent and Additional Rent due for the period immediately preceding the holdover.  No holdover by Tenant or payment by Tenant after the termination of this Lease shall be construed to extend the Term or prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise. If Landlord is unable to deliver possession of the Premises to a new tenant or to perform improvements for a new tenant as a result of Tenant’s holdover and Tenant fails to vacate the Premises within thirty (30) days after notice from Landlord, Tenant shall be liable for all damages that Landlord suffers from the holdover.

23.Subordination to Mortgages; Estoppel Certificate.

Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now or subsequently arising upon the Premises, the Building or the Complex, and to renewals, modifications, refinancings and extensions thereof (collectively referred to as a “Mortgage”). The party having the benefit of a Mortgage shall be referred to as a “Mortgagee”. This clause shall be self-operative, but upon request from a Mortgagee, Tenant shall execute a commercially reasonable subordination agreement in favor of the Mortgagee. As an alternative, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease.  Upon request, Tenant, without charge, shall attorn to any successor to Landlord’s interest in this Lease.  Landlord and Tenant shall each, within ten (10) days after receipt of a written request from the other, execute and deliver a commercially reasonable estoppel certificate to those parties as are reasonably requested by the other (including a Mortgagee or

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prospective purchaser). Without limitation, such estoppel certificate may include a certification as to the status of this Lease, the existence of any defaults and the amount of Rent that is due and payable.  Upon Tenant’s prior written request, Landlord shall request from Landlord’s current Mortgagee such Mortgagee’s standard form of subordination and non-disturbance agreement, provided that Landlord shall under no circumstances be liable for the failure or refusal of such Mortgagee to provide the same.

24.Notice.

All demands, approvals, consents or notices (collectively referred to as a “notice”) shall be in writing and delivered by hand or sent by registered or certified mail with return receipt requested or sent by overnight or same day courier service at the party’s respective Notice Address(es) set forth in Section 1.  Each notice shall be deemed to have been received on the earlier to occur of actual delivery or the date on which delivery is refused, or, if Tenant has vacated the Premises or any other Notice Address of Tenant without providing a new Notice Address, three (3) days after notice is deposited in the U.S. mail or with a courier service in the manner described above.  Either party may, at any time, change its Notice Address (other than to a post office box address) by giving the other party written notice of the new address.

25.Surrender of Premises.

At the termination of this Lease or Tenant’s right of possession, Tenant shall remove Tenant’s Property from the Premises, and quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear and damage which Landlord is obligated to repair hereunder excepted. If Tenant fails to remove any of Tenant’s Property within seven (7) days after termination of this Lease or Tenant’s right to possession, Landlord, at Tenant’s sole cost and expense, shall be entitled (but not obligated) to remove and store Tenant’s Property.  Landlord shall not be responsible for the value, preservation or safekeeping of Tenant’s Property.  Tenant shall pay Landlord, upon demand, the expenses and storage charges incurred. If Tenant fails to remove Tenant’s Property from the Premises or storage, within thirty (30) days after notice, Landlord may deem all or any part of Tenant’s Property to be abandoned and title to Tenant’s Property shall vest in Landlord.

26.Parking.

Tenant is specifically granted non-reserved vehicle access to the parking lot located adjacent to the Building at a ratio of 3.5 vehicle spaces per each one thousand (1,000) rentable square feet of the Premises (i.e. non-reserved parking for fifty-three (53) motor vehicles based upon the Tenant’s occupancy of 14,907 rentable square feet; the foregoing referred to herein as “Tenant’s Parking Rights”).   Tenant’s Parking Rights shall be non-transferable (directly or indirectly) to any other institutions, entities or individuals.  Overnight parking at the Building shall be strictly prohibited.

Landlord shall not be responsible for money, jewelry, automobiles or other personal property lost in or stolen from the parking lot.  Landlord shall not be liable for any loss,

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injury or damage to persons using the parking lot or automobiles or other property thereon, it being agreed that, to the fullest extent permitted by law, the use of the parking lot and the parking spaces shall be at the sole risk of Tenant and its employees.  Except for emergency repairs, Tenant and its employees shall not perform any work on any automobiles while located in the parking lot.

Tenant’s Parking Rights shall be subject to such reasonable rules and regulations therefor as may be set and changed with reasonable prior notice by the Landlord from time to time and uniformly enforced by Landlord during the Term.  Landlord agrees that such rules and regulations shall be established and applied by Landlord in a non-discriminatory fashion, such that all rules and regulations shall be generally applicable to all other tenants of the Building of a similar nature of Tenant.  Tenant’s Parking Rights above are non-assignable and intended solely for the use of Tenant’s employees working from and business invitees to the Premises; and as such Tenant shall not offer them for “use” or “license” to any other entity, the general public, or any other tenants of the Building.  All such appurtenant rights for parking as set forth in this Section are automatically terminated upon termination of this Lease, and shall have no separate independent validity or legal standing.  Landlord reserves the right to relocate and/or temporarily close any or all of the parking facilities to the extent necessary in the event of a casualty or governmental taking or for maintenance and repairs of the parking facility provided Landlord shall reopen the same or provide replacement parking facilities as soon as practicable thereafter.

27.Landlord’s Reserved Right.

Landlord and Tenant acknowledge that the Premises are in a Building and Complex which are not open to the general public. Access to the Building or Complex is restricted to Landlord, Tenant, their agents, employees and contractors and to their invited visitors. In the event of a labor dispute including a strike, picketing, informational or associational activities directed at Tenant or any other tenant, Landlord reserves the right unilaterally to alter Tenant’s ingress and egress to the Building or Complex or make any other change in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location.

28.Miscellaneous.

28.1This Lease shall be interpreted and enforced in accordance with the Laws of the state or commonwealth in which the Building is located and Landlord and Tenant hereby irrevocably consent to the jurisdiction and proper venue of such state or commonwealth.  If any term or provision of this Lease shall to any extent be void or unenforceable, the remainder of this Lease shall not be affected. If there is more than one Tenant or if Tenant is comprised of more than one party or entity, the obligations imposed upon Tenant shall be joint and several obligations of all the parties and entities, and requests or demands from any one person or entity comprising Tenant shall be deemed to have been made by all such persons or entities.  Notices to any one person or entity shall be deemed to have been given to all persons and entities. Tenant represents and warrants to Landlord that each individual executing this Lease on behalf of Tenant is authorized to do so on

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behalf of Tenant and that Tenant is not, and the entities or individuals constituting Tenant or which may own or control Tenant or which may be owned or controlled by Tenant are not, among the individuals or entities identified on any list compiled pursuant to Executive Order 13224 for the purpose of identifying suspected terrorists.

28.2If either party institutes a suit against the other for violation of or to enforce any covenant, term or condition of this Lease, the prevailing party shall be entitled to all of its costs and expenses, including, without limitation, reasonable attorneys’ fees.  Landlord and Tenant hereby waive any right to trial by jury in any proceeding based upon a breach of this Lease.  Either party’s failure to declare a default immediately upon its occurrence, or delay in taking action for a default, shall not constitute a waiver of the default, nor shall it constitute an estoppel.

28.3Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant (other than the payment of the Security Deposit or Rent), the period of time for the performance of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor or materials, war, terrorist acts, civil disturbances and other causes beyond the reasonable control of the performing party (“Force Majeure”).

28.4Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations under this Lease and in the Building and Complex.  Upon transfer Landlord shall be released from any further obligations hereunder first arising after the date of such transfer and Tenant agrees to look solely to the successor in interest of Landlord for the performance of such obligations, provided that, any successor pursuant to a voluntary, third party transfer (but not as part of an involuntary transfer resulting from a foreclosure or deed in lieu thereof) shall have assumed Landlord’s obligations under this Lease.

28.5Landlord has delivered a copy of this Lease to Tenant for Tenant’s review only and the delivery of it does not constitute an offer to Tenant or an option. Tenant represents that it has dealt directly with and only with the Broker as a broker in connection with this Lease.  Tenant shall indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any other brokers claiming to have represented Tenant in connection with this Lease. Landlord shall indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease.

28.6Time is of the essence with respect to each provision of this Lease. The expiration of the Term, whether by lapse of time, termination or otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to accrue after the expiration or termination of this Lease.

28.7Landlord shall not disturb Tenant’s use of the Premises, subject to the terms of this Lease, provided Tenant pays the Rent and fully performs all of its covenants and agreements.  This covenant shall be binding upon Landlord and its successors (which term shall include Mortgagee only to the extent set forth in a so-called subordination,

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non-disturbance and attornment agreement) only during its or their respective periods of ownership of the Building.

28.8This Lease does not grant any rights to light or air over or about the Building.  Landlord excepts and reserves exclusively to itself any and all rights not specifically granted to Tenant under this Lease. This Lease constitutes the entire agreement between the parties and supersedes all prior agreements and understandings related to the Premises, including all lease proposals, letters of intent and other documents.  Neither party is relying upon any warranty, statement or representation not contained in this Lease.  This Lease may be modified only by a written agreement signed by an authorized representative of Landlord and Tenant.

28.9Tenant shall not record this Lease or any memorandum or notice without Landlord’s prior written consent; provided, however, Landlord agrees to consent to the recordation or registration of a memorandum or notice of this Lease, at Tenant’s cost and expense (and in a form reasonably satisfactory to Landlord), if the initial term of this Lease or the initial term plus extension terms granted exceed, in the aggregate, seven (7) years.  If this Lease is terminated before the Term expires, upon Landlord’s request the parties shall execute, deliver and record an instrument acknowledging the above and the date of the termination of this Lease, and Tenant appoints Landlord its attorney-in-fact in its name and behalf to execute the instrument if Tenant shall fail to execute and deliver the instrument after Landlord’s request therefor within ten (10) days.

28.10Within fifteen (15) days after Landlord’s request, Tenant will furnish Tenant’s most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant or, failing those, Tenant’s internally prepared financial statements; provided, however, so long as Tenant is a publicly traded company, Landlord agrees that the then most recent Form 10-K (or similar form filed with the SEC) may be provided to Landlord in lieu of such financial statements. Notwithstanding the foregoing, Tenant shall have no obligation to provide to Landlord financial statements as provided in the preceding sentence more often than once per year during the Term. Tenant will discuss its financial statements with Landlord and will give Landlord access to Tenant’s books and records in order to enable Landlord to verify the financial statements. Landlord will not disclose any aspect of Tenant’s financial statements that Tenant designates to Landlord as confidential except (1) to Landlord’s lenders or prospective purchasers of the Building, (2) in litigation between Landlord and Tenant, and (3) if required by court order.

28.11Whenever Tenant requests Landlord to take any action or give any consent required or permitted under this Lease, Tenant will reimburse Landlord, as Additional Rent, for Landlord’s reasonable costs incurred in reviewing the proposed action or consent, including, without limitation, reasonable attorneys’, engineers’ or architects’ fees, within thirty (30) days after Landlord’s delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action.

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28.12Tenant and its telecommunications companies, including but not limited to local exchange telecommunications companies and alternative access vendor services companies shall have no right of access to and within the Building, for the installation and operation of telecommunications systems including but not limited to voice, video, data, and any other telecommunications services provided over wire, fiber optic, microwave, wireless, and any other transmission systems, for part or all of Tenant’s telecommunications within the Building and from the Building to any other location without Landlord’s prior written consent. Landlord shall not unreasonably withhold its consent to the installation and operation of such telecommunications systems, telecommunication services and/or transmission systems if located entirely within the Premises; otherwise, Landlord may withhold or delay its consent in its sole discretion.

28.13Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord’s benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord’s prior written consent except (1) to Tenant’s lenders or in connection with an Ownership Change by Tenant, (2) in litigation between Landlord and Tenant, (3) if required by court order, and (4) if required by any applicable law or regulation (including any SEC regulation). The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure.

28.14The term “Hazardous Materials” means any substance, material, or waste which is now or hereafter classified or considered to be hazardous, toxic, or dangerous under any Law relating to pollution or the protection or regulation of human health, natural resources or the environment, or poses or threatens to pose a hazard to the health or safety of persons on the Premises or in the Building. Tenant shall not use, generate, store, or dispose of, or permit the use, generation, storage or disposal of Hazardous Materials on or about the Premises or the Building except in a manner and quantity necessary for the ordinary performance of Tenant’s business, and then in compliance with all Laws. If Tenant breaches its obligations under this Section, Landlord may immediately take any and all action reasonably appropriate to remedy the same, including taking all appropriate action to clean up or remediate any contamination resulting from Tenant’s use, generation, storage or disposal of Hazardous Materials. Tenant shall defend, indemnify, and hold harmless Landlord and its representatives and agents from and against any and all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including attorneys’ fees and cost of clean up and remediation) arising from Tenant’s failure to comply with the provisions of this Section. This indemnity provision shall survive termination or expiration of the Lease.

29.OFAC Compliance.

29.1As an inducement to Landlord to enter into this Lease, Tenant represents and warrants that (a) Tenant and each person, entity, group or nation owning an interest in Tenant or directly or indirectly controlling Tenant are (i) not currently identified on the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Assets Control, Department of the Treasury (“OFAC”) and/or on any other similar list maintained by OFAC pursuant to any authorizing statute, executive order or regulation

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(collectively, the “List”) as a terrorist or other banned or blocked person, and (ii) not a person, entity, group or nation with whom a citizen of the United States is prohibited to engage in transactions by any trade embargo, economic sanction, or other prohibition of United States law, regulation, or Executive Order of the President of the United States, (b) none of the funds or other assets of Tenant constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person (as hereinafter defined), (c) no Embargoed Person has any interest of any nature whatsoever in Tenant (whether directly or indirectly), (d) none of the funds of Tenant have been derived from any unlawful activity with the result that the investment in Tenant is prohibited by law or that the Lease is in violation of law, and (e) Tenant has implemented procedures, and will consistently apply those procedures, to ensure the foregoing representations and warranties remain true and correct at all times.  The term “Embargoed Person” means any person, entity or government subject to trade restrictions under U.S. law, including but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. §1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated thereunder with the result that the investment in Tenant is prohibited by law or Tenant is in violation of law.  In connection with the foregoing, it is expressly understood and agreed that (x) any breach by Tenant of the foregoing representations and warranties shall be deemed an immediate default under this Lease (without the benefit of notice or grace) and shall be covered by the indemnity provisions of this Lease, and (y) the representations and warranties contained in this subsection shall be continuing in nature and shall survive the expiration or earlier termination of this Lease.

29.2Tenant covenants and agrees (a) to comply with all requirements of law relating to money laundering, anti-terrorism, trade embargoes and economic sanctions, now or hereafter in effect, (b) to immediately notify Landlord in writing if any of the representations, warranties or covenants set forth in this paragraph or the preceding paragraph are no longer true or have been breached or if Tenant has a reasonable basis to believe that they may no longer be true or have been breached, (c) not to use funds from any “Prohibited Person” (as such term is defined in the September 24, 2001 Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism) to make any payment due to Landlord under the Lease and (d) at the request of Landlord, to provide such information as may be requested by Landlord to determine Tenant’s compliance with the terms hereof.

29.3Tenant hereby acknowledges and agrees that Tenant’s inclusion on the List at any time during the Lease Term shall be a material default of the Lease.  Notwithstanding anything herein to the contrary, Tenant shall not permit the Premises or any portion thereof to be used or occupied by any person or entity on the List or by any Embargoed Person (on a permanent, temporary or transient basis), and any such use or occupancy of the Premises by any such person or entity shall be a material default of the Lease.

30.Antenna.

Subject to any rights previously given by Landlord to other parties and otherwise subject to such reasonable rules and regulations as Landlord may promulgate from time to time for the purpose of safety and frequency management, Tenant may continue to maintain

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Tenant’s existing dome antenna (the “Antenna”) serving the Premises on top of the Building throughout the Term of this Lease and any renewals or extension thereof subject to the following conditions:  (i) Tenant shall maintain the Antenna at its sole cost and expense in a safe condition and good repair throughout the Term; (ii) prior to any work to be performed on the Antenna, Tenant shall submit to Landlord for its review and approval (which approval shall not be unreasonably withheld, conditioned or delayed) plans and specifications for such work in accordance with the reasonable direction of Landlord relative thereto; (iii) Tenant shall obtain all the necessary permits and approvals which may be required from all lawful authorities (including those responsible for overseeing historical structures) for the continued use of such Antenna; and (iv) as a condition to such continued use of the Antenna, during such time as Landlord is performing Landlord’s Work, Tenant shall, at Tenant’s sole cost and expense relocate the cable(s) connecting the Antenna and Tenant’s Premises (and relocate the Antenna to an alternate location on the top of the Building, in a location reasonably designated by Landlord, if necessary) such that no portion of such cable passes through the premises of any tenant adjacent to the Premises (including without limitation the space in the Building Tenant is vacating under the Sublease referenced in 3.1 above); provided, however, that the cable may pass through the conduit in which it is currently located into the electrical room on the first floor of the Building and through the ceiling of the Premises adjacent to Tenant’s Premises (the “Antenna Cable”).  In the event Tenant desires to access the Antenna Cable, Tenant shall coordinate such access through Landlord and shall have no right to independently access the adjacent Premises.  In addition, Landlord reserves the right to relocate the Antenna Cable, at Landlord’s expense, to alternate locations reasonably determined by Landlord.  In the event that Landlord performs repairs to or replaces the roof, Tenant shall, at Tenant’s cost, remove the Antenna and relocate it to an alternate location reasonably designated by Landlord and reasonably acceptable to Tenant until such time as Landlord has completed such repairs or replacements.  The Antenna shall be removed by Tenant, at Tenant’s cost, in a good and workmanlike manner upon the expiration or sooner termination of this Lease.

Accompanied by a representative of Landlord, Tenant or Tenant’s representatives may, at reasonable times during the Term, gain access to the Antenna for the inspection, maintenance, repair, replacement or removal of same.  Any penetrations to the roof of the Building authorized under this Section 30, at Landlord’s election, shall be performed by Landlord’s roofing contractor.  To the extent not inconsistent with this Section 30, Section 9 of this Lease shall govern the performance of any work authorized under this Section 30 and Landlord’s and Tenant’s respective rights and obligations regarding such work.

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Landlord and Tenant have executed this Lease as of the day and year first above written.

WITNESS/ATTEST:	LANDLORD:
/s/ Laura Allen	NORMANDY NICKERSON ROAD, LLC, a
	Delaware limited liability company
Name (print):
	By:	/s/ Raymond P. Trevisan
	Name:
	Title:
WITNESS/ATTEST:	TENANT:
/s/ Karen Hicks	BIO-KEY INTERNATIONAL, INC., a Delaware
	corporation
Name (print):	By:	/s/ Francis J. Cusick
	Name:
	Title:
	41-1741861
	Tenant’s Tax ID Number (SSN or FEIN)

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EXHIBIT A

OUTLINE AND LOCATION OF PREMISES

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EXHIBIT B

EXPENSES AND TAXES

This Exhibit is attached to and made a part of the Lease by and between NORMANDY NICKERSON ROAD, LLC, a Delaware limited liability company (“Landlord”) and BIO-KEY INTERNATIONAL, INC., a Delaware corporation (“Tenant”) for space in the Building located at 300 Nickerson Road, Marlborough, Massachusetts 01752.

1.Payments.

1.1Tenant shall pay Tenant’s Pro Rata Share of the amount, if any, by which Expenses (defined below) for each calendar year during the Term exceed Expenses for the Base Year (the “Expense Excess”) and also the amount, if any, by which Taxes (defined below) for each Fiscal Year during the Term exceed Taxes for the Base Year (the “Tax Excess”).  If Expenses or Taxes in any calendar year or Fiscal Year decrease below the amount of Expenses or Taxes for the Base Year, Tenant’s Pro Rata Share of Expenses or Taxes, as the case may be, for that calendar year or Fiscal Year shall be $0.  Landlord shall provide Tenant with a good faith estimate of the Expense Excess and of the Tax Excess for each calendar year or Fiscal Year during the Term.  On or before the first day of each month, Tenant shall pay to Landlord a monthly installment equal to one-twelfth of Tenant’s Pro Rata Share of Landlord’s estimate of both the Expense Excess and Tax Excess. After its receipt of the revised estimate, Tenant’s monthly payments shall be based upon the revised estimate.  If Landlord does not provide Tenant with an estimate of the Expense Excess or the Tax Excess by January 1 of a calendar year, Tenant shall continue to pay monthly installments based on the previous year’s estimate(s) until Landlord provides Tenant with the new estimate.

1.2As soon as is practical following the end of each calendar year or Fiscal Year, as the case may be, Landlord shall furnish Tenant with a statement of the actual Expenses and Expense Excess and the actual Taxes and Tax Excess for the prior calendar year or Fiscal Year, as the case may be.  If the estimated Expense Excess or estimated Tax Excess for the prior calendar year or Fiscal Year, as the case may be, is more than the actual Expense Excess or actual Tax Excess for the prior calendar year or Fiscal Year, as the case may be, Landlord shall either provide Tenant with a refund or apply any overpayment by Tenant against Additional Rent due or next becoming due, provided if the Term expires before the determination of the overpayment, Landlord shall refund any overpayment to Tenant after first deducting the amount of Rent due.  If the estimated Expense Excess or estimated Tax Excess for the prior calendar year or Fiscal Year, as the case may be, is less than the actual Expense Excess or actual Tax Excess, for such prior calendar year or Fiscal year, as the case may be, for such prior year, Tenant shall pay Landlord, within thirty (30) days after its receipt of the statement of Expenses or Taxes, any underpayment for the prior calendar year.  This provision shall survive the termination or earlier expiration of the Lease.

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2.Expenses.

2.1“Expenses” means all costs and expenses incurred in each calendar year in connection with operating, maintaining, repairing, and managing the Building and/or Complex.  Expenses include, without limitation: (a) all labor and labor related costs; (b) management fees; (c) the cost of equipping, staffing and operating an on-site and/or off-site management office; (d) accounting costs; (e) the cost of services; (f) rental and purchase cost of parts, supplies, tools and equipment; (g) insurance premiums and deductibles; (h) electricity, gas and other utility costs; and (i) the amortized cost of capital improvements (as distinguished from replacement parts or components installed in the ordinary course of business) made subsequent to the Base Year which are:  (1) performed primarily to reduce current or future operating expense costs, upgrade security or otherwise improve the operating efficiency of the Building and/or Complex; or (2) required to comply with any Laws that are enacted, or first interpreted to apply to the Building and/or Complex, after the date of this Lease.  The cost of capital improvements shall be amortized by Landlord over the lesser of the Payback Period (defined below) or the useful life of the capital improvement as reasonably determined by Landlord. “Payback Period” means the reasonably estimated period of time that it takes for the cost savings resulting from a capital improvement to equal the total cost of the capital improvement. Landlord, by itself or through an affiliate, shall have the right to directly perform, provide and be compensated for any services under this Lease.   Any Expenses generally applicable to the Complex as a whole or any portion thereof shall be equitably prorated and Tenant’s initial Pro-Rata Share of such Expenses shall be as set forth in Section 1.4 of the Lease.  If Landlord incurs Expenses for the Building and/or Complex together with one or more other buildings or properties, whether pursuant to a reciprocal easement agreement, common area agreement or otherwise, the shared costs and expenses shall be equitably prorated and apportioned between the Building, Complex and the other buildings or properties.

2.2Expenses shall not include: the cost of capital improvements (except as set forth above); depreciation; principal payments of mortgage and other non-operating debts of Landlord; the cost of repairs or other work to the extent Landlord is reimbursed by insurance, condemnation proceeds or other third parties; costs in connection with leasing space in the Building and/or Complex, including brokerage commissions; lease concessions, rental abatements and construction allowances granted to specific tenants; costs incurred in connection with the sale, financing or refinancing of the Building and/or Complex; fines, interest and penalties incurred due to the late payment of Taxes or Expenses; organizational expenses associated with the creation and operation of the entity which constitutes Landlord; any penalties or damages that Landlord pays to Tenant under this Lease or to other tenants in the Building and/or Complex under their respective leases; or any fines or penalties incurred on account of violations by Landlord of any governmental rule or requirement.

2.3If at any time during a calendar year the Building and/or Complex is not at least 95% occupied or Landlord is not supplying services to at least 95% of the total Rentable Square Footage of the Building and/or Complex, Expenses shall, at Landlord’s option, be

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determined as if the Building and/or Complex, as applicable, had been 95% occupied and Landlord had been supplying services to 95% of the Rentable Square Footage of the Building and/or Complex.  If Expenses for a calendar year are determined as provided in the prior sentence, Expenses for the Base Year shall also be determined in such manner. Notwithstanding the foregoing, Landlord may calculate the extrapolation of Expenses under this Section based on 100% occupancy and service so long as such percentage is used consistently for each year of the Term.  Landlord shall not recover as Expenses more than 100% of the Expenses actually paid by Landlord.

3.“Taxes” shall mean:  (a) all real property taxes and other assessments on the Building and/or Complex, including, but not limited to, gross receipts taxes, assessments for special improvement districts and building improvement districts, governmental charges, fees and assessments for police, fire, traffic mitigation or other governmental service of purported benefit to the Complex, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments and the Complex’s share of any real estate taxes and assessments under any reciprocal easement agreement, common area agreement or similar agreement as to the Complex; (b) all personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Complex; and (c) all costs and fees incurred in connection with seeking reductions in any tax liabilities described in (a) and (b), including, without limitation, any costs incurred by Landlord for compliance, review and appeal of tax liabilities.  Without limitation, Taxes shall not include any income, capital levy, transfer, capital stock, gift, estate or inheritance tax.  If a change in Taxes is obtained for any year of the Term during which Tenant paid Tenant’s Pro Rata Share of any Tax Excess, then Taxes for that year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on the adjustment.  Likewise, if a change is obtained for Taxes for the Base Year, Taxes for the Base Year shall be restated and the Tax Excess for all subsequent years shall be recomputed.  Tenant shall pay Landlord the amount of Tenant’s Pro Rata Share of any such increase in the Tax Excess within thirty (30) days after Tenant’s receipt of a statement from Landlord.

4.Audit Rights.  Tenant, within ninety (90) days after receiving Landlord’s statement of Expenses, may give Landlord written notice (“Review Notice”) that Tenant intends to review Landlord’s records of the Expenses for the calendar year to which the statement applies.  Within a reasonable time after receipt of the Review Notice, Landlord shall make all pertinent records available for inspection that are reasonably necessary for Tenant to conduct its review.  If any records are maintained at a location other than the management office for the Building, Tenant may either inspect the records at such other location or pay for the reasonable cost of copying and shipping the records.  If Tenant retains an agent to review Landlord’s records, the agent must be with a CPA firm licensed to do business in the state or commonwealth where the Building is located.  Tenant shall be solely responsible for all costs, expenses and fees incurred for the audit.  Within ninety (90) days after the records are made available to Tenant, Tenant shall have the right to give Landlord written notice (an “Objection Notice”) stating in reasonable detail any objection to Landlord’s statement of Expenses for that year. If Tenant fails to give Landlord an Objection Notice within the 90-day period or fails to provide Landlord

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with a Review Notice within the 90-day period described above, Tenant shall be deemed to have approved Landlord’s statement of Expenses and shall be barred from raising any claims regarding the Expenses for that year.  The records obtained by Tenant shall be treated as confidential.  In no event shall Tenant be permitted to examine Landlord’s records or to dispute any statement of Expenses unless Tenant has paid and continues to pay all Rent when due.

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EXHIBIT C

[Intentionally Omitted]

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EXHIBIT D

COMMENCEMENT LETTER

(EXAMPLE)

Date

Tenant

Address

Re:Commencement Letter with respect to that certain Lease dated as of the            day of                     , 2008, by and between NORMANDY NICKERSON ROAD, LLC, a Delaware limited liability company (“Landlord”) and BIO-KEY INTERNATIONAL, INC., a Delaware corporation (“Tenant”) for 14,907 rentable square feet on the first floor of Building located at 300 Nickerson Road, Marlborough, Massachusetts 01752.

Dear                                    :

In accordance with the terms and conditions of the above referenced Lease, Tenant accepts possession of the Premises and agrees:

1.The Commencement Date of the Lease is                                                 ;

2.The Termination Date of the Lease is                                                         .

Please acknowledge your acceptance of possession and agreement to the terms set forth above by signing all 3 counterparts of this Commencement Letter in the space provided and returning 2 fully executed counterparts to my attention.

Sincerely,

Authorized Signatory

Agreed and Accepted:

Tenant:	BIO-key International, Inc.
By:
Name:
Title:
Date:

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EXHIBIT E

BUILDING RULES AND REGULATIONS

The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking facilities (if any), the Complex and the appurtenances.  In the event of a conflict between the following rules and regulations and the remainder of the terms of the Lease, the remainder of the terms of the Lease shall control.  Capitalized terms have the same meaning as defined in the Lease.

1.Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises.  No rubbish, litter, trash, or material shall be placed, emptied, or thrown in those areas.  At no time shall Tenant permit Tenant’s employees to loiter in Common Areas or elsewhere about the Building or Complex.

2.Plumbing fixtures and appliances shall be used only for the purposes for which designed and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed in the fixtures or appliances.  Damage resulting to fixtures or appliances by Tenant, its agents, employees or invitees shall be paid for by Tenant and Landlord shall not be responsible for the damage.

3.No signs, advertisements or notices shall be painted or affixed to windows, doors or other parts of the Building or Complex, except those of such color, size, style and in such places as are first approved in writing by Landlord.  All tenant identification and suite numbers at the entrance to the Premises shall be installed by Landlord, at Tenant’s cost and expense, using the standard graphics for the Building. Except in connection with the hanging of lightweight pictures and wall decorations, no nails, hooks or screws shall be inserted into any part of the Premises or Building except by the Building maintenance personnel without Landlord’s prior approval, which approval shall not be unreasonably withheld.

4.Landlord may provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board or other directory device listing tenants and no other directory shall be permitted unless previously consented to by Landlord in writing.

5.Tenant shall not place any lock(s) on any door in the Premises or Building without Landlord’s prior written consent, which consent shall not be unreasonably withheld, and Landlord shall have the right at all times to retain and use keys or other access codes or devices to all locks within and into the Premises.  A reasonable number of keys to the locks on the entry doors in the Premises shall be furnished by Landlord to Tenant at Tenant’s cost and Tenant shall not make any duplicate keys.  All keys shall be returned to Landlord at the expiration or early termination of the Lease.

6.All contractors, contractor’s representatives and installation technicians performing work in the Building shall be subject to Landlord’s prior approval, which approval shall not be unreasonably withheld, and shall be required to comply with Landlord’s standard rules,

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regulations, policies and procedures, which may be revised from time to time. Landlord has no obligation to allow any particular telecommunication service provider to have access to the Buildings or to the Premises.  If Landlord permits access, Landlord may condition the access upon the payment to Landlord by the service provider of fees assessed by Landlord in Landlord’s sole discretion.

7.Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of merchandise or materials requiring the use of elevators, stairways, lobby areas or loading dock areas, shall be restricted to hours reasonably designated by Landlord.  Tenant shall obtain Landlord’s prior approval by providing a detailed listing of the activity, which approval shall not be unreasonably withheld.  If approved by Landlord, the activity shall be under the supervision of Landlord and performed in the manner required by Landlord.  Tenant shall assume all risk for damage to articles moved and injury to any persons resulting from the activity.  If equipment, property, or personnel of Landlord or of any other party is damaged or injured as a result of or in connection with the activity, Tenant shall be solely liable for any resulting damage, loss or injury.

8.Landlord shall have the right to approve the weight, size, or location of heavy equipment or articles in and about the Premises, which approval shall not be unreasonably withheld.  Damage to the Building or Complex by the installation, maintenance, operation, existence or removal of Tenant’s Property shall be repaired at Tenant’s sole expense.

9.Corridor doors, when not in use, shall be kept closed.

10.Tenant shall not:  (1) make or permit by those claiming under Tenant any improper, objectionable or unpleasant noises or odors in the Building, or otherwise interfere in any way with other tenants or persons having business with them; (2) solicit business or distribute or cause to be distributed, in any portion of the Building or Complex, handbills, promotional materials or other advertising; or (3) conduct or permit by those claiming under Tenant other activities in the Building or Complex that might, in Landlord’s sole opinion, constitute a nuisance.

11.No animals, except those assisting handicapped persons, shall be brought into the Building or Complex or kept in or about the Premises.

12.No inflammable, explosive or dangerous fluids or substances shall be used or kept by Tenant in the Premises, Building or about the Complex, except for those substances as are typically found in similar premises used for general office purposes and are being used by Tenant in a safe manner and in accordance with all applicable Laws.  Tenant shall not, without Landlord’s prior written consent, use, store, install, spill, remove, release or dispose of, within or about the Premises or any other portion of the Complex, any asbestos-containing materials or any solid, liquid or gaseous material now or subsequently considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq., M.G.L. c. 21C, M.G.L. c. 21E or any other applicable environmental Law which may now or later be in effect.  Tenant shall comply with all Laws pertaining to and

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governing the use of these materials by Tenant and shall remain solely liable for the costs of abatement and removal.

13.Tenant shall not use or occupy the Premises in any manner or for any purpose which might injure the reputation or impair the present or future value of the Premises, the Building or the Complex. Tenant shall not use, or permit any part of the Premises to be used for lodging, sleeping or for any illegal purpose.

14.Tenant shall not take any action which would violate Landlord’s labor contracts or which would cause a work stoppage, picketing, labor disruption or dispute or interfere with Landlord’s or any other tenant’s or occupant’s business or with the rights and privileges of any person lawfully in the Building or Complex (“Labor Disruption”).  Tenant shall take the actions necessary to resolve the Labor Disruption, and shall have pickets removed and, at the request of Landlord, immediately terminate any work in the Premises that gave rise to the Labor Disruption, until Landlord gives its written consent for the work to resume.  Tenant shall have no claim for damages against Landlord or any of the Landlord Related Parties nor shall the Commencement Date of the Term be extended as a result of the above actions.

15.Tenant shall not install, operate or maintain in the Premises or in any other area of the Building or Complex, electrical equipment that would overload the electrical system beyond its capacity for proper, efficient and safe operation as determined solely by Landlord.  Tenant shall not furnish cooling or heating to the Premises, including, without limitation, the use of electronic or gas heating devices, without Landlord’s prior written consent.  Tenant shall not use more than its proportionate share of telephone lines and other telecommunication facilities available to service the Building.

16.Tenant shall not operate or permit to be operated a coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes and other goods), except for machines for the exclusive use of Tenant’s employees and invitees.

17.Bicycles and other vehicles are not permitted inside the Building or on the walkways outside the Building, except in areas designated by Landlord.

18.Landlord may from time to time adopt systems and procedures for the security and safety of the Complex, the Building, its occupants, entry, use and contents.  Tenant, its agents, employees, contractors, guests and invitees shall comply with Landlord’s systems and procedures.

19.Landlord shall have the right to prohibit the use of the name of the Complex, the Building or any other publicity by Tenant that in Landlord’s sole opinion may impair the reputation of the Complex, the Building or their desirability.  Upon written notice from Landlord, Tenant shall refrain from and discontinue such publicity immediately.

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20.Neither Tenant nor its agents, employees, contractors, guests or invitees shall smoke or permit smoking in the Common Areas, unless a portion of the Common Areas have been declared a designated smoking area by Landlord, nor shall the above parties allow smoke from the Premises to emanate into the Common Areas or any other part of the Building.  Landlord shall have the right to designate the Building (including the Premises) as a non-smoking building.

21.Landlord shall have the right to designate and approve standard window coverings for the Premises and to establish rules to assure that the Building presents a uniform exterior appearance.  Tenant shall ensure, to the extent reasonably practicable, that window coverings are closed on windows in the Premises while they are exposed to the direct rays of the sun.

22.Deliveries to and from the Premises shall be made only at the times in the areas and through the entrances and exits reasonably designated by Landlord.  Tenant shall not make deliveries to or from the Premises in a manner that might interfere with the use by any other tenant of its premises or of the Common Areas, any pedestrian use, or any use which is inconsistent with good business practice.

23.The work of cleaning personnel shall not be hindered by Tenant after 5:30 p.m., and cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures may be cleaned at any time.  Tenant shall provide adequate waste and rubbish receptacles to prevent unreasonable hardship to the cleaning service.

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EXHIBIT F

LANDLORD’S WORK

This Exhibit is attached to and made a part of the Lease by and between NORMANDY NICKERSON ROAD, LLC, a Delaware limited liability company (“Landlord”) and BIO-KEY INTERNATIONAL, INC., a Delaware corporation (“Tenant”) for space in the Building located at 300 Nickerson Road, Marlborough, Massachusetts 01752.

Landlord and Tenant have attached to this Lease as Exhibit F-1 preliminary plans and specifications for the construction of the Premises (the “Landlord Work”) which have been approved by Landlord and Tenant (the “Plans”).  Subject to Tenant’s delivery of $3,000 to Landlord as Tenant’s contribution for installation of electrical outlets set forth in item 13 of Exhibit F-1 prior to commencement of construction, Landlord agrees to construct the Premises on a “turnkey basis” in accordance with the Plans, which construction shall be completed in a good and workmanlike manner and in compliance with all applicable laws and regulations.

In the event Tenant desires any changes to the Plans, Tenant shall submit to Landlord proposed changes to the Plans.  Within five (5) business days after receipt of any proposed changes from Tenant, Landlord shall approve or reject same and if rejecting same, shall state the reasons for such rejection, and Landlord’s approval shall not be unreasonably withheld or delayed, except that Landlord shall have complete discretion with regard to granting or withholding approval of the portions of the changes to the extent the they would impact the Building’s structure or systems, affect future marketability of the Premises or Building or would be visible from the common facilities or exterior of the Building.  Landlord shall, upon granting of any approval, notify Tenant of the amount of additional cost arising therefrom, if any, which shall include Landlord’s designated contractor’s Profit of ten percent (10%) (“Additional Construction Cost”), which Tenant shall pay to Landlord upon demand, and the amount of additional time required by Landlord to implement and complete said changes.   Tenant reserves the right to approve the undertaking of such subcontractor work within five (5) business days of the date Landlord provides Tenant with the Additional Construction Cost.  If Tenant fails to notify Landlord in writing that Tenant does not approve such contractor work, Tenant shall be deemed to have approved same. Tenant hereby acknowledges that any failure by Tenant to approve such subcontractor work may result in a delay in completion of the Landlord’s Work.  In the event of a rejection by Landlord of any proposed changes, Tenant may revise such changes and re-submit them pursuant hereto.  No plans submitted to Landlord shall be considered to be Plans unless they are submitted to Landlord signed and in proper and sufficient form for Landlord to obtain all necessary permits and approvals to construct the Premises in accordance with such Plans.  All change order requests and information pertaining thereto shall be conveyed to Landlord by                               , Tenant’s designated representative.

In the event Tenant desires any change in the Plans, Tenant shall submit to Landlord together with the proposed changes, instructions to Landlord as to whether to cease work or cease any segment of work while the change is in the approval process or whether Landlord should continue constructing the Premises in accordance with the Plans notwithstanding the proposed changes thereto.  In the event no such instructions are given, Landlord shall continue constructing the Premises in accordance with the Plans without regard to the proposed changes

thereto.  If Landlord has stopped work, or some segment thereof at Tenant’s request, Landlord shall not recommence same until Landlord receives written instructions from Tenant authorizing the recommencement of such work.  Upon the granting of any approval, Landlord shall notify Tenant of Landlord’s estimate of the delay in completion that will be caused by such proposed revision of the Plans.  In the event of a rejection by Landlord of a proposed revision, Tenant may make changes to the proposed revision and resubmit it pursuant hereto.  Upon receiving Landlord’s approval to any revision, Tenant shall, as soon thereafter as practicable, but in no event in excess of five (5) business days, and understanding that any delay in responding may cause delays in completion substantially greater than the estimate given by Landlord, authorize the work that Tenant desires by approving in writing the work and the cost thereof, and submitting to Landlord signed revised Plans sufficient for Landlord to obtain all necessary permits and approvals to construct the Premises in accordance with such revised plans.  Upon the submission of such revised plans, such revised plans shall become the Plans hereunder.

EXHIBIT F-1

SPACE PLAN

EXHIBIT F-1

SPECIFICATIONS

PROPOSED TENANT IMPROVEMENTS FOR

BIO-KEY

300 Nickerson Road, Marlboro MA

6-3-2008

Referenced floor plan:

SP1 dated 5-9-2008

1. Demolition:

Remove all items required by new layout.

2. Interior Partitions:

New interior walls shall be constructed of 3-5/8” x 25 Ga. metal studs at 16” O/C with 1/2” gypsum wallboard on both sides. Walls shall extend to 6” above the ceiling grid.

New demising wall (and portions of existing walls which will become demising walls) shall be full height.

3. Doors, Frames and Hardware:

Reuse existing doors, frames and hardware wherever possible. Provide new units (to match existing) as required by new layout.  Side light windows shall be installed adjacent to each new interior doorway (not to exceed a total of 3 side light windows).

4. Ceilings:

Existing tiles and grid to remain and be repaired, with new suspended ceiling system (to match adjacent areas) only as required by new layout.

5. Lighting:

Existing fixtures shall be reused. Provide new fixtures (to match existing) as required by new layouts. Each room and area shall be individually switched.

6. Power:

Separate power and lighting circuits for this Tenant and provide “Emon Demon” metering of all power/lighting panels.

7. HVAC:

Existing system diffusers and ductwork will be relocated, with new ductwork for supplemental cooling, diffusers, controls & equipment as required by new layout.  Current 2-ton and 3-ton HVAC units owned by Tenant and servicing Tenant’s current QA labs to be redirected as follows (see attached diagram Exhibit F-2):

· 3-ton: New QA labs (Rooms 1A & 1B)

· 2-ton: IT Network Room

· Current House HVAC will provide supplemental air to Rooms 1A and 1B

8. Plumbing

No Work.

9. Floor Finishes:

Repair existing flooring damaged by demolition and new work

Provide base to match existing on new walls.

10. Paint:

Paint new walls, doors and frames to match existing.

11. Fire Protection:

Existing sprinkler system to be modified as required by new layout

12. Life Safety:

Modify existing fire alarm devices, emergency lighting and exit signs as required by new layout.

13.Electrical outlets

The following electrical outlets shall be installed (with Tenant contribution of $3,000) as shown on the diagram attached as Exhibit F-3:

IT Room

· Four sets of 2 side-by-side 30amp outlets installed on combination of west and north walls.

QA Labs

A.Room 1A

· Two 20amp outlets installed on east wall (4 plugs per outlet)

· Five 20amp outlets installed west wall (new permanent wall between 1A & 1B) (4 plugs per outlet)

B.Room 1B

· Five 20amp outlets installed east wall (new permanent wall between 1A & 1B) (4 plugs per outlet)

· Five 20amp outlets installed west wall (new permanent wall between 1B and Training Room) (4 plugs per outlet)

Training Room

· Three 20amp outlets installed east wall (new permanent wall between 1B and Training Room) (4 plugs per outlet)

14. Work not included:

Installation of telephone and computer wiring.

Furnishings including, but not limited to, open office work stations and reception desk.

Security system.

END

EXHIBIT F-2

EXHIBIT F-2

EXHIBIT F-3

EXHIBIT G

FORM OF LETTER OF CREDIT

[Name of Financial Institution]

Irrevocable Standby

Letter of Credit

No.

Issuance Date:

Expiration Date:

Applicant:

Beneficiary

Normandy Nickerson Road, LLC

1776 On the Green

67 Park Place East

Morristown, NJ 07960

Attention:  Raymond P. Trevisan

   Principal, General Counsel

Ladies/Gentlemen:

We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of the above referenced Applicant in the amount of                                           U.S. Dollars ($                                        ) available for payment at sight by your draft drawn on us when accompanied by the following documents:

An original copy of this Irrevocable Standby Letter of Credit.

Beneficiary’s dated statement purportedly signed by an authorized signatory or agent reading: “This draw in the amount of                                              U.S. Dollars ($                        ) under your Irrevocable Standby Letter of Credit No.                                          represents funds due and owing to us pursuant to the terms of that certain lease by and between                                             , as landlord, and                           , as tenant, and/or any amendment to the lease or any other agreement between such parties related to the lease.”

It is a condition of this Irrevocable Standby Letter of Credit that it will be considered automatically renewed for a one year period upon the expiration date set forth above and upon each anniversary of such date, unless at least 60 days prior to such expiration date or applicable anniversary thereof, we notify you in writing by certified mail return receipt requested or by recognized overnight courier service, that we elect not to so renew this Irrevocable Standby Letter of Credit.   In addition to the foregoing, we understand and agree that you shall be entitled to draw upon this Irrevocable Standby Letter of Credit in accordance with 1 and 2 above in the

event that we elect not to renew this Irrevocable Standby Letter of Credit and, in addition, you provide us with a dated statement purportedly signed by an authorized signatory or agent of Beneficiary stating that the Applicant has failed to provide you with an acceptable substitute irrevocable standby letter of credit in accordance with the terms of the above referenced lease.  We further acknowledge and agree that:  (a) upon receipt of the documentation required herein, we will honor your draws against this Irrevocable Standby Letter of Credit without inquiry into the accuracy of Beneficiary’s signed statement and regardless of whether Applicant disputes the content of such statement; (b) this Irrevocable Standby Letter of Credit shall permit partial draws and, in the event you elect to draw upon less than the full stated amount hereof, the stated amount of this Irrevocable Standby Letter of Credit shall be automatically reduced by the amount of such partial draw; and (c) you shall be entitled to transfer your interest in this Irrevocable Standby Letter of Credit from time to time and more than one time without our approval and without charge.  In the event of a transfer, we reserve the right to require reasonable evidence of such transfer as a condition to any draw hereunder.

This Irrevocable Standby Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 revision) ICC Publication No. 500.

We hereby engage with you to honor drafts and documents drawn under and in compliance with the terms of this Irrevocable Standby Letter of Credit.

All communications to us with respect to this Irrevocable Standby Letter of Credit must be addressed to our office located at                                                                                              to the attention of                                                                     .

Very truly yours,

[name]

[title]

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael W. DePasquale, certify that:

1.I have reviewed this quarterly report on Form 10-Q of BIO-key International, Inc. (the “Company”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;

5.The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 14, 2008
	/s/ Michael W. DePasquale
	Michael W. DePasquale
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Francis J. Cusick, certify that:

1.I have reviewed this quarterly report on Form 10-Q of BIO-key International, Inc. (the “Company”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;

5.The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 14, 2008
	/s/ Francis J. Cusick
	Francis J. Cusick
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-QSB for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael W. DePasquale, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

BIO-KEY INTERNATIONAL, INC.
By:	/s/ Michael W. DePasquale
	Michael W. DePasquale
	Chief Executive Officer
Date: November 14, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of BIO-key International, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Francis J. Cusick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

BIO-KEY INTERNATIONAL, INC.
By:	/s/ Francis J. Cusick
	Francis J. Cusick
	Chief Financial Officer
Date: November 14, 2008