INTRODUCTION

1.1. Authorization of the Notes. The Company has authorized the issuance of Seven Percent (7%) Convertible Promissory Notes in the respective principal amounts set forth in Section 3.5 below in the form attached hereto as Exhibit A (the “ Convertible Notes ”) to Shaar on the terms and conditions set forth in this Agreement. Each Holder hereby consents to the issuance of his or its Convertible Note, and the indebtedness represented thereby, on the terms and conditions set forth in this Agreement.

2.1. Title. Each Holder has good title to his or its Exchanged Shares free and clear of any and all restrictions, encumbrances, liens, rights, title or interests of others, other than restrictions under applicable securities laws.

2.2. Authority. Each Holder has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby and to deliver his or its Exchanged Shares to the Company in accordance herewith.

3.1. Entity Matters. The Company is duly organized and validly existing in good standing under the laws of the State of Delaware, has all requisite power and authority to conduct its business and to own its property as the same is and shall be conducted or owned, and is qualified to do business as a foreign corporation in all locations required under the laws of each

jurisdiction in which it does business and under which the failure so to qualify and remain in good standing would have a material adverse effect on the Company. The execution of this Agreement, the Convertible Notes, the Series D Preferred Stock and the Warrants (collectively, the “ Exchange Documents ”) will not violate the Company’s Certificate of Incorporation or By-Laws.

3.2. No Violation . The performance by the Company of the Company’s obligations hereunder or under any other Exchange Document does not constitute a violation of any law, order, regulation, contract, or agreement to which the Company is a party or by which the Company or the Company’s property may be bound and does not require any filing or registration with, or any permit, license, consent, or approval of, any governmental agency or regulatory authority, other than the filing of the Series D Certificate of Designation with the Secretary of State of the State of Delaware, or the waiver, consent or approval of any other party which has not been or will not be duly obtained as of the Closing Date.

3.3. No Litigation . There is no litigation or arbitration pending or, to the Company’s knowledge , threatened against the Company which, if adversely decided, could materially impair the ability of the Company to pay and perform the Company’s obligations under any Exchange Document.

3.4. Exchange Documents Enforceable. The Exchange Documents have been duly authorized, executed, and delivered by the Company and are legal, valid, and binding instruments, enforceable against the Company in accordance with their respective terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights and general principles of equity that restrict the availability of equitable or legal remedies .

3.5. Amount of Notes . The principal amount of the Convertible Note to be issued to each Holder will be equal to the aggregate amount of all accrued and unpaid dividends on such Holder’s Exchanged Shares to and including the Closing Date.

4.1. Representations and Warranties . All representations and warranties made by or on behalf of the Company shall be true, correct and complete in all material respects on and as of the Closing Date.

4.2. Sale of the Company’s Law Enforcement Division . The closing of the sale of the Company’s Law Enforcement Division to InterAct911 Mobile Systems, Inc. (the “ Buyer ”) pursuant to that certain Asset Purchase Agreement dated as of August 13, 2009 (as amended, restated, supplemented or otherwise modified from time to time, the “ Asset Purchase Agreement ”) by and between the Company and the Buyer shall have occurred.

4.3. Redemption of Series B and Series C Preferred Stock . All outstanding shares of the Company’s Series B Convertible Preferred Stock, $0.0001 par value per share (“ Series B Preferred Stock ”), and Series C Convertible Preferred Stock, $0.0001 par value per share

(“ Series C Preferred Stock ”), shall have been redeemed in accordance with the terms of Section 7(a) of the Certificate of Designation for the Series B Preferred Stock and Section 7(a) of the Certificate of Designation for the Series C Preferred Stock, respectively . The parties acknowledge and agree that in the event that any holder of Series B Preferred Stock or Series C Preferred Stock (other than the Holders) has his or its shares redeemed on terms more favorable than those contained in the Certificate of Designation with respect to such series, each Holder shall be entitled to have its or his shares of Series B Preferred Stock and/or Series C Preferred Stock, as applicable, redeemed on the most favorable terms afforded to any other such holder.

4.4. Officer’s Certificate . An officer of the Company shall deliver to the Holders a certificate certifying that the conditions specified in Sections 4.1, 4.2 and 4.3 hereof have been satisfied.

4.5. Additional Conditions Precedent . Each Holder shall have received each of the following, as applicable:

5.1. Governing Law . THIS AGREEMENT AND EACH OTHER EXCHANGE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT BY ANY PARTY AGAINST ANOTHER CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND EACH OTHER EXCHANGE AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK, IN EACH CASE SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN. ALL PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE OTHER EXCHANGE AGREEMENTS ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY OTHER EXCHANGE AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR

UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT OR ANY OTHER EXCHANGE AGREEMENT.

5.2. Termination . This Agreement shall terminate and be of no further force or effect if the Closing (as defined in the Asset Purchase Agreement) shall not have been consummated by January 31, 2010; provided, however, that in such event, the Company agrees to issue to the Shaar a Warrant in the form of the Warrant to purchase up to 2,000,000 shares of Common Stock at an exercise price of $0.30 per share.

5.3. Survival . The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Holders and for one year after the date of the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument, unless otherwise specified therein.

5.4. Successors . Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, heirs, executors and administrators of the parties hereto. No Holder may assign its rights hereunder to a competitor of the Company. The Company may not assign its rights or delegate its obligations hereunder to a third party without obtaining the consent of the Holders, such consent not to be unreasonably withheld or delayed.

5.5. Entire Agreement . This Agreement, the other Exchange Documents, the exhibits and schedules hereto and thereto and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein.

5.6. Omitted .

5.7. Amendments and Waivers . This Agreement may be amended or modified only upon the written consent of the Company and Shaar.

5.8. Delays or Omissions . It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the other Exchange Documents, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. All remedies, either under this Agreement or the other Exchange Documents, by law or otherwise afforded to any party, shall be cumulative and not alternative.

5.9. Notices . All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (a) personal delivery to the party to be notified, (b) when sent, if sent by electronic

mail or facsimile during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a nationally recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. All communications shall be sent to the respective parties at the following addresses or to such other e-mail address, facsimile number or address as subsequently modified by written notice given in accordance with this Section:

5.10. Titles and Subtitles . The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

5.11. Facsimile Signatures; Counterparts . This Agreement may be executed by facsimile signatures and in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

5.12. Broker’s Fees . Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker’s or finder’s fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to

indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation by such party in this Section 5.12 being untrue.

5.13. Construction . Each party acknowledges that its legal counsel participated in the preparation of this Agreement and the other Exchange Documents and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other.

(a) the Convertible Note executed and delivered by the Company in favor of such Holder;

(b) certificates for their respective shares of Series D Preferred Stock executed and delivered by the Company;

(c) their respective Warrants executed and delivered by the Company; and

(d) Such other and further documents, agreements and instruments as the Holders or their counsel may reasonably require to evidence, confirm or give effect to the undertakings of the Company set forth herein.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2009

Commission File Number 1-13463

BIO-KEY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		41-1741861
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification Number)

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

(Address of Principal Executive Offices) (Zip Code)

(732) 359-1100

Issuer’s telephone number, including area code.

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Exchange on which Registered
Common Stock, $0.0001 par value per share		None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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 in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was $7,410,824.

As of March 24, 2010, the registrant had 77,713,398 shares of common stock outstanding.

Documents Incorporated by Reference: None

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TABLE OF CONTENTS

	PART I	1

Item 1.	Description of Business	1
Item 1A	Risk Factors	8
Item 2	Description of Property	13
Item 3	Legal Proceedings	13
Item 4	Reserved	13

	PART II	14

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6	Selected Financial Data	16
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	25
Item 8	Financial Statements and Supplementary Data	25
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	25
Item 9A	Controls and Procedures	25
Item 9B	Other Information	26

	PART III	27

Item 10	Directors, Executive Officers and Corporate Governance	27
Item 11	Executive Compensation	30
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	36
Item 13	Certain Relationships and Related Transactions, and Director Independence	38
Item 14	Principal Accountant Fees and Services	39
Item 15	Exhibits	40
	Signatures	74

PRIVATE SECURITIES LITIGATION REFORM ACT

All statements other than statements of historical facts contained in this Annual Report on Form 10-K, 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 our plans, intentions and expectations reflected in the forward-looking statements are reasonable, we cannot be sure 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 under the caption “Risk Factors” in Item 1A of this Annual Report 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.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

BIO-key International, Inc., a Delaware corporation (the “Company,” “BIO-key,” “we,” or “us), was founded in 1993 to develop and market advanced fingerprint biometric technology and software solutions. Biometric technology is the science of analyzing specific human characteristics which are unique to each individual in order to identify a specific person from a broader population. First incorporated as BBG Engineering, the company became SAC Technologies in 1994. The BIO-key name was introduced in 2002.

We develop and market advanced fingerprint identification biometric technology and software solutions. We were among the initial pioneers in developing automated, finger identification technology that can be used without the aid of non-automated methods of identification such as a personal identification, password, token, smart card, ID card, credit card, passport, driver’s license or other form of possession or knowledge based identification. This advanced BIO-key™ identification technology improves both the accuracy and speed of finger-based biometrics.

Since our inception in 1993, we have spent substantial time and effort in completing the development of what we believe is the most discriminating and effective commercially available finger-based biometric technology. During the past five years, our primary focus has shifted to marketing and selling this technology and completing strategic acquisitions that can help us leverage our capability to deliver identification solutions. We have built a direct sales force of professionals with substantial experience in selling technology solutions to government and corporate customers.

In 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 officers, such as detectives who are not typically in their vehicles, a hand-held mobile information software solution. Also in, 2004, BIO-key completed a transaction with Aether Systems, Inc. to purchase its 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. Their PacketCluster mobile information software is integrated with 50 separate State/NCIC databases, as well as other state, local and federal databases.

In 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. In 2009, BIO-key completed a transaction with InterAct911 Mobile Systems, Inc. (InterAct911), a subsidiary of InterAct911 Corporation, in which InterAct911 acquired substantially all the assets related to the Company’s Law Enforcement division.

As a result of these transactions, and as discussed in Note M to the Consolidated Financial Statements included in this report, we have organized the Company into one reporting segment: Biometrics. During the year ended December 31, 2009, the Company continued to focus on its primary objectives of increasing revenue and managing expenses, by developing leadership technology and applications and by providing its customers with high quality support and service.

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Markets

Finger-based Biometric Identification

BIO-key is a leader in finger-based biometric identification. In partnerships with OEMs, integrators, and solution providers, we provide biometric software solutions to private and public sector customers. BIO-key provides the ability to positively identify individuals before granting access to valuable corporate resources, web portals or applications in seconds. Powered by our patented Vector Segment Technology™ our VST™, WEB-key® and BSP development kits are fingerprint biometric solutions that provide true interoperability with all major reader manufacturers, enabling application developers and integrators to seamlessly integrate fingerprint biometrics into virtually any application. BIO-key development tools deliver a tangible return on a security platform investment that can:

· Reduce risk

· Improve user convenience

· Lower operating costs

BIO-key’s patented Vector Segment Technology (VST) is the foundation for these solutions. BIO-key’s unique solutions provide users with the ability to positively identify themselves to applications with the simple scan of their finger. This capability is a significant improvement in both convenience and security over other alternatives and provides companies with a cost-effective solution to thwart phishing attacks and comply with government regulations and legislation such as FFIEC compliance, HIPAA, HSPD-12, and the Electronic Signatures Act. BIO-key couples these capabilities with device interoperability, system flexibility and scalability.

BIO-key has formed relationships with providers of biometric logon software including Softex, Janus Associates, Indigo, IBM and Computer Associates to provide enterprise-ready SingleSignOn systems to many large companies in the US and abroad. BIO-key has partnership agreements with leading technology companies including Sagem Morpho, McKesson, LexisNexis, and IBM to deliver advanced biometric applications for government, civil and commercial clients. Through its partnership with Oracle, BIO-key has integrated its biometric technology into the entire Fusion Middleware and Identity Management software stack to offer all of Oracle customers a scalable biometric authentication solution. Also, BIO-key has integrated VST to a physical access solution developed and distributed by its partner NextGenID. This solution has been deployed across the US at many leading companies.

· Growth potential —As the provider of the core technology, BIO-key’s greatest growth potential is as a partner with companies that offer applications that address growing concerns related to quickly and accurately identifying individuals for both commercial and civil applications and thwarting the potential for identity theft.

For example, BIO-key, along with partners, has deployed biometric logical and physical access solutions. These include working with Allscripts and IBM to provide strong network based authentication and with the Pegasus Program to authenticate users accessing a nationwide information-sharing system designed by and for the nation’s sheriffs. These represent the kind of partnership-based opportunities BIO-key may see in the finger-based biometric market.

Products

The Company’s biometric identification technology improves both the accuracy and speed of identifying individuals. The Company’s proprietary biometric technology extracts unique data from a fingerprint and uses it to positively identify an individual. The technology has been built to be completely scalable to handle databases containing millions of fingerprints. BIO-key achieves the highest levels of discrimination without requiring any other identifying data—like a userID, smart card, or token. BIO-key’s core technology supports interoperability on over 40 different commercially available readers. This interoperability is a key differentiator for BIO-key in the biometric market. BIO-key has full support for industry standards and received National Institute of Standards and Technology (“NIST”) certification on its ability to support HSPD-12 supported INCITS-378 templates. We believe we have the largest deployment of ISO standard templates in the world with over 300 million created in Bangladesh. Extending our products to support standards enables BIO-key to participate in large government projects like Transportation Workers Identification Card (TWIC), Registered Traveler projects, PIV initiatives, and FIXS consortium solutions. We believe our fingerprint identification technology has a broad range of information security and access control applications, including:

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· Securing Internet sites and electronic transactions

· Securing access to logical networks and applications

· Securing access to buildings and restricted areas

· Providing fast, accurate member identification services

· Securing mobile devices such as biometric enabled handhelds and PDA’s

· Preventing identity theft through positive user identification and false alias validation

BIO-key’s finger identification algorithm—Vector Segment Technology (VST™) is the core intellectual property behind its full suite of biometric products that include:

· Vector Segment Technology SDK (VST) —BIO-key’s biometric development kit that provides developers the ability to take advantage of a highly accurate, device interoperable algorithm. VST is available as a low level SDK for incorporation into any application architecture to increase security while not sacrificing convenience. VST runs on Windows, Linux or Solaris systems.

· True User Identification ®—BIO-key’s biometric identification solution that offers large scale one to many user lookup with nothing but a single fingerprint. This solution enables customers to perform false alias checks and manage fraudulent access to systems. True User Identification leverages commercially available databases, like Oracle, to scale the identification capabilities to millions of users. The solution also runs on commercially available hardware making it truly scalable for any size system.

· WEB-key ®—BIO-key’s biometric security platform for managing fingerprint authentication across unprotected networks including the Internet. It extends all features and functionalities of the VST algorithm to customers looking to add an enhanced level of security to their thin client and client/server applications. WEB-key currently is supported by both Windows and Linux operating systems.

· Biometric Service Provider™ —BIO-key provides support for the BioAPI (a standards based solution meeting worldwide needs) for a compliant interface to applications using biometrics for verification and identification. BIO-key enhances the traditional use of the BioAPI by adding support for CE devices, supporting identification calls and also providing a single user interface for multiple fingerprint readers.

· ID Director ™—BIO-key’s solution for single sign on integration with Computer Associates SiteMinder, Oracle’s Fusion Middleware SSO, and other solutions, utilizing the power and security of WEB-key. This solution provides a simple to implement, custom authentication scheme for companies looking to enhance authentication. ID Director can easily add a level of security and convenience to the transaction level of any application.

Current Business Plan

BIO-key’s current business plan is to:

· License its core technology “VST” and True User Identification® to original equipment manufacturers, systems integrators, and application developers who develop products and applications that utilize its biometric finger matching solutions.

· License WEB-key®, the Company’s security centric web-based biometric authentication solution.

· Integrate its core technology competencies to leverage new business opportunities and develop new markets for its innovative products.

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Competition

In addition to companies that provide existing commonplace methods of restricting access to facilities and logical access points such as pass cards, PIN numbers, passwords, locks and keys, there are numerous companies involved in the development, manufacturing and marketing of fingerprint biometrics products to commercial, government, law enforcement and prison markets. These companies include, but are not limited to, Cogent, NEC, L-1 Identity Solutions and Sagem-Morpho.

The majority of sales for automated fingerprint identification products in the market to date have been deployed for government and law enforcement applications.. The consumer and commercial markets represent areas of significant growth potential for biometrics. Additionally, the majority of companies competing for commercial opportunities are in the business of selling scanning devices and these companies tie their algorithm to specific hardware. BIO-key has created a “device independent” algorithm that provides flexibility in choosing the correct device to fit the application served.

BIO-key has found that commercial markets have been slow to widely purchase biometrics as a viable alternative to their current security methods. As a result, the primary competition for biometric technology consists of traditional security methods such as passwords, PINs, cards and tokens.

With respect to competing biometrics technologies, each has its strength and weaknesses and none has emerged as a market leader:

· Fingerprint identification is generally viewed as inexpensive and non-intrusive.

· Iris scanning is viewed as accurate, but the hardware is significantly more expensive.

· Facial recognition can have accuracy limitations and is typically highly dependent on ambient lighting conditions, angle of view and other factors.

The market for biometric technology continues to evolve. Computer breaches, identity theft, phishing and other events in the recent past are driving a large-scale shift to biometric deployments. In addition, companies such as IBM, Dell and HP have all introduced computers with integrated finger scanning devices to complement the conventional username/password technique since it is highly susceptible to hackers and security breaches. BIO-key supports these integrated devices for broader enterprise level security solutions.

BIO-key believes that the next wave of opportunity for finger biometrics is the mobility market where a number of Smartphone and PDA manufacturers are incorporating finger scanners in their devices for more convenient secure access to the handset itself and ultimately for applications. Our secure “one to many” technology framework can provide a “finger only” access to any application via the web or a 3G or local area network.

Marketing and Distribution

BIO-key’s marketing and distribution efforts comprise the following major initiatives:

· Over the past few years, BIO-key has strengthened its alliance with Oracle and has been recognized as a Certified Partner in the Oracle Partner Network. BIO-key supports the Oracle e-business suite of applications and provides the biometric enabler for the Oracle Single Sign on product. As an Oracle development partner, BIO-key provides the underlying database used for true user identification and on demand alias checking. As a development partner, BIO-key participates in Oracle Trade Shows such as Oracle Open World and Oracle Apps World.

· BIO-key has strategic alliances with technology leaders including Oracle, Computer Associates, IBM, AT&T, and others.

· BIO-key is also promoting biometric technology and its offerings through industry trade shows, public speaking

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engagements, press activities and partner marketing programs

· BIO-key is directing licensing efforts to original equipment manufacturers, application developers and system integrators.

· BIO-key is continuing to build a reseller, integrator and partner network as well as a direct sales team.

Addressing the Market

Following are the specific marketing/sales programs in place:

· Direct Selling Efforts — BIO-key’s direct sales force focuses on OEMs and large entities in the commercial and Government markets. The sales team has extensive sales experience and expertise in emerging biometric technologies. The BIO-key sales force is rounded out by Inside Sales, which is responsible for maintaining and supporting our existing install base, acting as a front-line support for any inquiries on our product line, and facilitating activities that make the field team more productive.

· Conferences and Trade Shows — BIO-key attends and actively participates in various product-related conferences and trade shows in the technology and security industries to generate market awareness of biometric and wireless mobile data technology generally and our offerings specifically.

· Strategic Alliance — BIO-key’s strategic alliances and reseller agreements with other vendors play a significant role in our overall sales efforts. In the past year, BIO-key has initiated and bolstered numerous important and promising long-term relationships. Just a few examples include:

· BIO-key is an active member in CA, IBM and Oracle partner programs, delivering authentication and identification solutions integrated with their Identity Management platform to their customers worldwide.

· BIO-key is focusing on specific vertical markets including healthcare where it continues to grow on successful integration of its identification technology to provide convenient, accurate and fast user identification in partner solutions including McKesson and Allscripts

Licensing

BIO-key targets both Internet infrastructure companies and large portal providers as possible licensees for its WEB-key® solution. On the Internet infrastructure side, BIO-key seeks to partner with Internet server manufacturers, providers of database and data warehouse engine software, horizontally positioned application engines, firewall solution providers and peripheral equipment manufacturers. On the portal side, BIO-key is targeting financial service providers such as credit and debit card authorization and issuing institutions, Internet retailers, business-to-business application service providers (ASPs) and corporate intranets. In the past five years, BIO-key has undertaken a WEB-key ® and VST direct selling effort, and entered into license agreements with OEMs and system integrators to develop applications for distribution to their respective customers.

BIO-key is also addressing the security needs of application providers in the following vertical markets:

· Government —Using BIO-key’s technology, Northup Grumman deployed an application within the Department of Defense to cross-credential visitors and contractors to certain military bases. Also BIO-key, in conjunction with MorphoTrak, is providing the finger matching platform for the FBI’s Next Generation IAFIS system, which today is one of the world’s largest biometric systems.

· Education —Educational Biometric Technologies and Identimetrics have incorporated BIO-key technology to enable school children to pay for school lunch programs and checkout library books using their fingerprints. VST technology enables schools to enroll these children and reduces the administrative costs of managing passwords and

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collecting payments.

· Commerce: LexisNexis has implemented various solutions in thousands of locations in over 70 countries using BIO-key’s VST technology to reduce fraud and identity theft.

· Patient Records and Information Management: Allscripts has integrated and deployed BIO-key’s biometric solution as a standard part of its Enterprise EHR solution. The integrated solution has been deployed at George Washington University, Holzer Clinic, Medisync, and many other Allscripts customers. HBOC, one of the largest healthcare patient records and information management companies, has integrated BIO-key technology into their portal and has deployed their solution in a pilot for the Baptist Hospital System. Also, the Indiana Blood Center is incorporating BIO-key’s large scale identity assurance platform to provide a safe, secure and convenient means for donors to confirm their identity. McKesson Provider Services has incorporated BIO-key’s “one-to-many” finger matching software into their Accudose line of medication and supplies dispensing systems solutions and is selling that equipment to clinics and hospitals nationwide.

· Financial: BIO-key is working with several companies focusing on financial applications such as point of sale systems and employee trusted identification cards, as well as customer facing applications over the Internet. BIO-key has also begun work with several financial institutions to incorporate its technology for secure access to money transfers for institutional customers.

Intellectual Property Rights

We believe that our intellectual property is important to our biometric operation:

· Patents —our biometrics segment uses patented technology and trade secrets developed or acquired by us.

In May 2005, the U.S. Patent & Trademark Office issued us a patent for our Vector Segment fingerprint technology (VST), BIO-key’s core biometric analysis and identification technology.

On August 29 2006, BIO-key announced that the Company’s patent for biometric identification indexing, a core feature of its VST™ software, has been granted in Europe. In addition, a WEB-key® authentication security patent for “Systems and Methods of Secure Biometric Authentication” has been issued in South Africa. These patents enhance the worldwide protection of BIO-key’s technology. The European patent for VST, which provides BIO-key with protection of its intellectual property in Europe, was issued on March 29, 2006 and covers a similar set of claims for a patent BIO-key was granted in 2005 in the United States.

On October 3, 2006, BIO-key announced that the Company’s patent for a biometric authentication security framework has been granted by the U.S. Patent & Trademark Office. The patent (No. 7,117,356) was issued to BIO-key for a biometric authentication security framework that enhances commercial and civil biometric use. BIO-key’s authentication security framework protects privacy and security while also facilitates ease of use of biometric systems. The technology that this patent is based on is the foundation for authentication security as incorporated in BIO-key’s WEB-key® product line. WEB-key is a mature enterprise authentication solution that functions in a wide variety of application environments. The solution supports a variety of implementation alternatives including card technologies for ‘two-factor’ authentication and also supports ‘single-factor’ authentication. Partners and customers implementing BIO-key’s WEB-key software to provide convenient and secure user identity include a number of institutions including the Allscripts Healthcare Solutions, American Association of Medical Colleges, Empresa de Telecomunicaciones de Bogotá (Columbia) and Iomedex Corporation.

On January 11, 2007, BIO-key announced that the U.S. Patent & Trademark Office has issued US patent No. 7,155,040 covering BIO-key’s unique image processing technology, which is critical for enhancing information used in the extraction of biometric minutiae. The issued patent protects a critical part of an innovative four-phase image enhancement process developed by BIO-key, and represents the third U.S. patent granted to the company for its biometric technology.

On April 15, 2008, BIO-key announced that the U.S. Patent and Trademark Office has issued US patent No. 7,359,553 covering BIO-key’s image enhancement and data extraction core algorithm components. The solution

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protected under this recently issued patent provides the capability to quickly and accurately transform a fingerprint image into a computer image that can be analyzed to determine the critical data elements

On October 15, 2008 BIO-key announced that the U.S. Patent and Trademark Office has issued US patent No. 7,415,605 for the company’s “Biometric Identification Network Security” method. The solution protected under this recently issued patent provides a defense against hackers and system attacks, while leveraging the industry standard Trusted Platform Module (TPM) specification for encryption key management.

On December 3, 2008 BIO-key announced that the U.S. Patent and Trademark Office has issued US patent No. 7,454,624 for the company’s “Match Template Protection within a Biometric Security System” method. The solution protected under this recently issued patent limits the scope of enrollment templates usage and also eliminates the need for revocation or encryption processes, which can be expensive and time consuming.

· Trademarks — We have registered our trademarks (“BIO-key”, “True User Identification”, and “WEB-key with the U.S. Patent & Trademark Office.

· Copyrights and trade secrets —We take measures to ensure copyright and license protection for our software releases prior to distribution. When possible, the software is licensed in an attempt to ensure that only licensed and activated software functions to its full potential. We also take measures to protect the confidentiality of our trade secrets.

Research and Development

Our research and development efforts are concentrated on enhancing the functionality, reliability and integration of our current products as well as developing new and innovative products for biometrics and law enforcement. Although BIO-key believes that its identification technology is one of the most advanced and discriminating fingerprint technologies available today, the markets in which BIO-key compete are characterized by rapid technological change and evolving standards. In order to maintain its position in the market, BIO-key will continue to upgrade and refine its existing technologies. In 2006, BIO-key announced the launch of IdentityMatch, our fingerprint identification system. IdentityMatch offers a tool for agencies to store and search fingerprints and the associated demographic data, the ability to compare new prints with those previously captured as a low-cost AFIS alternative or to be used for a wide variety of routine identification transactions not supported by AFIS.

During the fiscal years ended December 31, 2009 and 2008, BIO-key spent approximately $927,000 and $974,000 respectively, on its Biometric segment’s research, development and engineering. BIO-key’s limited customer base during that time did not directly bear these costs, which were principally funded through outside sources of equity and debt financing.

Government Regulations

BIO-key is not currently subject to direct regulation by any government agency, other than regulations generally applicable to businesses or related to specific project requirements. In the event of any international sales, the company would be subject to various domestic and foreign laws regulating such exports and export activities.

Environmental Regulations

As of the date of this report, BIO-key has not incurred any material expenses relating to our compliance with federal, state, or local environmental laws and does not expect to incur any material expenses in the foreseeable future.

Employees and Consultants

As of March 11, 2010, BIO-key employed fifteen (15) individuals individuals on a full-time basis five (5) in engineering, customer support, research and development; four (4) in finance and administration; and six (6) in sales and marketing. BIO-

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key also uses the services of two (2) consultants (full-time), who provide engineering and technical services, and one (1) part-time contracts administrator.

ITEM 1A. RISK FACTORS

Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements appearing just before our Description of Business section above.

Business and Financial Risks

Based on our lack of significant revenue since inception and recurring losses from operations, our auditors have included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.

Due to, among other factors, our history of losses (excluding gains from valuation changes in embedded derivatives) and limited revenue, our independent auditors have included an explanatory paragraph in their opinion for the year ended December 31, 2009 as to the substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared in accordance with accounting principals generally accepted in the United States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

Since our formation, we have historically generated minimal revenue and have sustained substantial operating losses.

As of December 31, 2009, we had working capital of approximately $868,000 and an accumulated deficit of approximately $50,087,000. Since our inception, we have focused almost exclusively on developing our core technologies and, until the fourth quarter of 2004 had not generated any significant revenue. In 2009 we sold our Law Enforcement division, losing the benefit of significant recurring revenue streams. In order to increase revenue, we have developed a direct sales force and anticipate the need to retain additional sales, marketing and technical support personnel and may need to incur substantial expenses. We cannot assure you that we will be able to secure these necessary resources, that a significant market for our technologies will develop or that we will be able to achieve our targeted revenue.

We have identified material weaknesses in our internal control over financial reporting. If we are unable to successfully address such material weaknesses, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting; this would harm our business and the trading price of our common stock.

After a review of our 2009 annual operating results, conducted pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, our Chief Executive Officer and our Chief Financial Officer have determined that, as of such date, our internal control over financial reporting was not effective as of December 31, 2009. Effective internal control over financial reporting are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. We have in the past discovered, as described above, and may in the future discover, areas of our internal control over financial reporting that need improvement. We are in the process of addressing these issues to ensure that our internal control over financial reporting are improved. If, however, we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. Additionally, if we are unable to adequately establish or improve our internal controls over financial reporting, our external auditors may not be able to issue an unqualified opinion on the effectiveness of our internal controls. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a significant negative effect on the trading price of our securities.

Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our technology.

Biometric technology has received only limited market acceptance, particularly in the private sector. Our technology represents a novel security solution and we have not yet generated significant sales. Although recent security concerns relating to identification of individuals has increased interest in biometrics generally, it remains an undeveloped, evolving market. Biometric based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel. Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including:

· the reliability of biometric solutions

· public perception regarding privacy concerns

· costs involved in adopting and integrating biometric solutions

For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand will be sufficient to create a market large enough to produce significant revenue or earnings. Our future success depends, in part, upon business customers adopting biometrics generally, and our solution

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specifically.

Biometric technology is a new approach to Internet security which must be accepted in order for our WEB-key ® solution to generate significant revenue.

Our WEB-key ® authentication initiative represents a new approach to Internet security which has been adopted on a limited basis by companies which distribute goods, content or software applications over the Internet. The implementation of our WEB-key ® solution requires the distribution and use of a finger scanning device and integration of database and server side software. Although we believe our solutions provide a higher level of security for information transmitted over the Internet than existing traditional methods, unless business and consumer markets embrace the use of a scanning device and believe the benefits of increased accuracy outweigh implementation costs, our solution will not gain market acceptance.

Our software products may contain defects which will make it more difficult for us to establish and maintain customers.

Although we have completed the development of our core biometric technology, it has only been used by a limited number of business customers. Despite extensive testing during development, our software may contain undetected design faults and software errors, or “bugs” that are discovered only after it has been installed and used by a greater number of customers. Any such defect or error in new or existing software or applications could cause delays in delivering our technology or require design modifications. These could adversely affect our competitive position and cause us to lose potential customers or opportunities. Since our technologies are intended to be utilized to secure physical and electronic access, the effect of any such bugs or delays will likely have a detrimental impact on us. In addition, given that biometric technology generally, and our biometric technology specifically, has yet to gain widespread acceptance in the market, any delays would likely have a more detrimental impact on our business than if we were a more established company.

While we have commenced a significant sales and marketing effort, we have only begun to develop a significant distribution channel and may not have the resources or ability to sustain these efforts or generate any meaningful sales.

In order to generate revenue from our biometric products, we are dependent upon independent original equipment manufacturers, system integrators and application developers, which we do not control. As a result, it may be more difficult to generate sales.

We market our technology through licensing arrangements with:

· Original equipment manufacturers, system integrators and application developers which develop and market products and applications which can then be sold to end users

· Companies which distribute goods, services or software applications over the Internet

As a technology licensing company, our success will depend upon the ability of these manufacturers and developers to effectively integrate our technology into products and services which they market and sell. We have no control over these licensees and can not assure you that they have the financial, marketing or technical resources to successfully develop and distribute products or applications acceptable to end users or generate any meaningful revenue for us. These third parties may also offer the products of our competitors to end users.

We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes, which may result in our technology becoming obsolete.

The Internet, facility access control and information security markets are subject to rapid technological change and intense competition. We compete with both established biometric companies and a significant number of startup enterprises as well as providers of more traditional methods of access control. Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior technologies, which may result in our technology becoming less competitive or obsolete. We may not be able to keep pace with this change. If we are unable to develop new applications or enhance our existing technology in a timely manner in response to technological changes, we will be unable to compete in our chosen markets. In addition, if one or more other biometric technologies such as voice, face, iris, hand geometry or blood vessel recognition are widely adopted, it would significantly reduce the potential market for our

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fingerprint identification technology.

We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.

A loss of our current Chairman of the Board of Directors or Chief Executive Officer could severely and negatively impact our operations. Our consulting contract with Thomas J. Colatosti, our Chairman of the Board, expires in December 2011. Mr. Colatosti assists the Company in the areas of strategic planning and corporate finance. In addition, our employment contract with Michael W. DePasquale, our Chief Executive Officer, expires in March 2011. Although the contract does not prevent him from resigning, it does contain confidentiality and non-compete clauses which are intended to prevent him from working for a competitor within one year after leaving our Company. Our success depends on our ability to attract, train and retain employees with expertise in developing, marketing and selling software solutions. In order to successfully market our technology, we will need to retain additional engineering, technical support and marketing personnel. The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and retain qualified persons.

We cannot assure you that the intellectual property protection for our core technology provides a sustainable competitive advantage or barrier to entry against our competitors.

Our success and ability to compete is dependent in part upon proprietary rights to our technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets and technical measures to protect our propriety rights. We have filed a patent application relating to both the optic technology and biometrics solution components of our technology wherein several claims have been allowed. Over the last few years, the U.S. Patent Office has issued us a series of patents for our Vector Segment fingerprint technology (VST), and our other core biometric analysis and identification technologies. We cannot assure you that any additional patents will be issued or that we will have the resources to protect any patent from infringement. Although we believe our technology does not currently infringe upon patents held by others, we cannot assure you that such infringements do not exist or will not exist in the future.

We may need to obtain additional financing to execute our business plan, which may not be available. If we are unable to raise additional capital or generate significant revenue, we may not be able to continue operations.

Since our inception, we have not generated significant, recurring revenue (other than revenue from acquired businesses) and have experienced substantial losses. In January 2006 we received approximately $1,000,000 in a private placement convertible debt offering, and in August 2006 we raised approximately $2,000,000 in gross proceeds through a private issuance of equity securities, of which $1,500,000 was received in cash and $500,000 was paid by an exchange of rights to declared and unpaid dividends. In May 2007 we received approximately $1,800,000 in net proceeds from the sale of our Fire/EMS Services division. In July and November 2009 we received $1,000,000 and $750,000, respectively in gross proceeds through the issuance of unsecured promissory notes. In December 2009 we received approximately $11,300,000 in net proceeds from the sale of our Law Enforcement division, of which $7,000,000 was paid in cash, and approximately $4,000,000 of which is payable in three annual installments.

If we are 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. Therefore, we may need to obtain additional financing through the issuance of debt or equity securities, or to restructure our financial position through similar transactions to those consummated during 2006, 2007, and 2009.

We cannot assure you that we will ever be able to secure any such financing on terms acceptable to us. If we cannot obtain such financing, we may not be able to execute our business plan or continue operations.

We may not achieve sustainable profitability with respect to the biometric component of our business if we are unable to maintain, improve and develop the wireless data services we offer.

We believe that our future business prospects depend in part on our ability to maintain and improve our current services and to develop new ones on a timely basis. Our services will have to achieve market acceptance, maintain technological

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competitiveness and meet an expanding range of customer requirements. As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance. If we cannot effectively develop and improve services we may not be able to recover our fixed costs or otherwise become profitable.

If we fail to adequately manage our resources, it could have a severe negative impact on our financial results or stock price.

We could be subject to fluctuations in technology spending by existing and potential customers. Accordingly, we will have to actively manage expenses in a rapidly changing economic environment. This could require reducing costs during economic downturns and selectively growing in periods of economic expansion. If we do not properly manage our resources in response to these conditions, our results of operations could be negatively impacted.

Our obligations to the holders of our outstanding preferred stock may adversely affect our ability to enter into potential significant transactions with other parties.

We will need to obtain the consent of the holders of a majority of the then outstanding shares of our convertible preferred stock before we can take certain actions, including the following:

· a sale or other disposition of any material assets;

· an acquisition of a material amount of assets;

· engaging in a merger, reorganization or consolidation; or

Accordingly, unless we obtain such consent, we may not be able to enter into certain transactions.

Risks Related To Our Common Stock

We have issued a substantial number of securities that are convertible into shares of our common stock which will result in substantial dilution to the ownership interests of our existing shareholders.

As of December 31, 2009, approximately 35,826,000 shares of our common stock were reserved for issuance upon exercise or conversion of the following securities (at conversion prices applicable as at December 31, 2009):

· 20,724,000 shares upon exercise of outstanding stock options and warrants;

· 1,927,000 shares upon exercise of options available for future grant under our existing option plans; and

· 10,714,000 shares or more upon conversion of our outstanding shares of Convertible Preferred Stock and cumulative dividends in arrears.

· 2,461,000 shares or more upon conversion of the outstanding principal of Convertible Promissory Notes and accrued interest payable.

The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing shareholders.

A substantial number of our convertible securities are convertible into shares of common stock at a conversion price of $.30 per share. Most of these shares are eligible for public resale. The trading price of our common stock and

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our ability to raise additional financing may be adversely affected by the influx into the market of such a substantial number of shares.

Our outstanding shares of Series D Convertible Preferred Stock (collectively, the “Preferred Stock”) and cumulative dividends in arrears are convertible into approximately 10,714,000 shares of common stock as of December 31, 2009, at a per share conversion price of $.30. In the event that shares issuable upon conversion of our Preferred Stock become eligible for public resale, this significant increase in the number of shares available for public sale may have a negative impact on the trading price of our shares and substantially dilute the ownership interests of our existing shareholders. In the event that our stock trades below $.30 per share, in order to raise additional financing we would likely be required to issue additional shares of common stock or securities convertible into common stock at a purchase or conversion price, as applicable, of less than $.30 per share. Any issuance of shares at a purchase price of less than $.30 per share would reduce the conversion price of our Preferred Stock to such lower price. This would require us to issue additional shares upon conversion of our Preferred Stock and further dilute the ownership interests of our existing shareholders. To the extent these factors are viewed negatively by the market, it may provide an incentive for persons to execute short sales of our common stock that could adversely affect the trading price of our common stock.

Applicable SEC Rules governing the trading of “penny stocks” limits the trading and liquidity of our common stock, which may affect the trading price of our common stock.

Our common stock currently trades on the OTC Bulletin Board. Since our common stock continues to trade below $5.00 per share, our common stock is considered a “penny stock” and is subject to SEC rules and regulations, which impose limitations upon the manner in which our shares can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

We do not intend to pay dividends in the foreseeable future.

We have never declared or paid a dividend on our common stock. In addition, the terms of our outstanding Preferred Stock preclude us from declaring or paying a dividend on our common stock unless a dividend is also declared or paid, as applicable, on our Preferred Stock. We intend to retain earnings, if any, for use in the operation and expansion of our business and, therefore, do not anticipate paying any dividends on our common stock in the foreseeable future.

The trading price of our common stock may be volatile.

The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this Report as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors. Although we believe that approximately 15 registered broker dealers currently make a market in our common stock, we can not assure you that any of these firms will continue to serve as market makers or have the financial capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares. In recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future-trading price of our common stock.

Completion of the Asset Sale may result in dilution of future earnings per share to the stockholders of BIO-key.

The completion of the asset sale of BIO-key’s Law Enforcement division to InterAct911 Mobile Systems, Inc. in December 2009 may not result in improved earnings per share of BIO-key. The sale could fail to produce the benefits that BIO-key anticipates, or could have other adverse effects that BIO-key currently does not foresee. In this event, the asset sale could result in a reduction of earnings per share of BIO-key as compared to the earnings per share that would have been achieved if the asset sale had not occurred.

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ITEM 2. DESCRIPTION OF PROPERTY

We do not own any real estate. We conduct operations from leased premises in Eagan, Minnesota (6,822 square feet), Wall, New Jersey (4,179 square feet) and Westford, Massachusetts (shared services center). We believe our current facilities are adequate for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Effective as of July 2, 2009, the Company entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with Longview Special Finance, Inc. and Longview Fund, L.P. (collectively, the “Longview Entities”) in order to resolve all matters relating to the litigation initiated by the Longview Entities earlier in 2009, in which they were seeking $2,886,563 in damages and an unspecified amount of interest and attorney’s fees from the Company as a result of the Company’s alleged improper failure to redeem their outstanding shares of the Company’s Convertible Preferred Stock (collectively, the “Shares”) in accordance with the terms and conditions of such preferred stock. Pursuant to the Settlement Agreement, without admission of any liability or fault, the parties agreed to a payment schedule under which the Company was required to pay a total cash settlement amount of $2,164,922, fifty percent (50%) of which was paid on July 7, 2009. The remaining portion of the settlement amount accrued interest at seventeen percent (17%) per annum and was required to be paid in full on or before October 30, 2009. In return, the Longview Entities agreed to a full and complete release of the Company from all claims that were or could have been alleged in the lawsuit and agreed to relinquish all of the Shares upon receiving final payment of the settlement amount. From October 30, 2009 until November 12, 2009, interest on the remaining portion of the settlement amount accrued at twenty percent (20%) per annum. On November 12, 2009, the Company paid in full the entire outstanding portion of the settlement amount, together with all accrued and unpaid interest, and satisfied all of its obligations to the Longview Entities under the Settlement Agreement.

ITEM 4. RESERVED

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock currently trades on the OTC Bulletin Board under the symbol “BKYI”. The following table sets forth the range of high and low bid prices per share of our common stock for each of the calendar quarters identified below as reported by the OTC Bulletin Board. These quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

2009:	High		Low

Quarter ended December 31, 2009	$	0.30	$	0.15
Quarter ended September 30, 2009	0.26		0.10
Quarter ended June 30, 2009	0.17		0.07
Quarter ended March 31, 2009	0.11		0.05

2008:	High		Low

Quarter ended December 31, 2008	$	0.11	$	0.04
Quarter ended September 30, 2008	0.20		0.09
Quarter ended June 30, 2008	0.18		0.10
Quarter ended March 31, 2008	0.13		0.10

Holders

As of March 24, 2010, the number of stockholders of record of our common stock was 170.

Dividends

We have not paid any cash dividends on our common stock to date, and have no intention of paying any cash dividends on our common stock in the foreseeable future. The terms of our outstanding Convertible Preferred Stock preclude us from declaring or paying a dividend on our common stock unless a dividend is also declared or paid, as applicable, on our Convertible Preferred Stock. The declaration and payment of dividends on our common stock is also subject to the discretion of our Board of Directors and certain limitations imposed under the Delaware General Corporation Law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

Equity Compensation Plan Information

For information regarding our equity compensation plans, see Item 12 included in this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities; use of Proceeds from Registered Securities

(a) On July 7, 2009, the Company issued an unsecured promissory note in the aggregate principal amount of $1,000,000 to The Shaar Fund Ltd. These securities were issued in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.

(b) On November 12, 2009, the Company issued an unsecured promissory note in the aggregate principal amount of $750,000 to The Shaar Fund Ltd. These securities were issued in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.

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(c) On November 12, 2009, the Company entered into a Securities Exchange Agreement with The Shaar Fund Ltd. and Mr. Thomas J. Colatosti (the “Holders”), pursuant to which these investors agreed to exchange 27,932 shares of the Company’s Series A Convertible Preferred Stock owned by the respective Holders, for 27,932 shares of the Company’s Series D Convertible Preferred Stock at an initial fixed conversion price of $0.30 per share. In addition, the Company issued convertible promissory notes in the aggregate principal amount of $737,957 to the Holders in exchange for all dividends accrued and unpaid on their Series A Convertible Preferred Stock. Also, the Company issued warrants to the Holders to purchase 5,000,000 shares of common stock at an initial exercise price of $0.30. These securities were issued in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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ITEM 6. SELECTED FINANCIAL DATA

N/A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion And Analysis Of Financial Condition And Results Of Operations, and other parts of this Report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in the section captioned “ RISK FACTORS ” in Item 1A and elsewhere in this Report. The following should be read in conjunction with our audited financial statements included elsewhere herein.

The following Management’s Discussion And Analysis Of Financial Condition And Results Of Operations (“MD&A”) is intended to help you understand BIO-key International (the “Company”, “we”, “us” or “our”). MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes. Our MD&A includes the following sections:

OVERVIEW provides a description of our business, the major items that affected our business, and how we analyze our business. It then provides an analysis of our overall 2009 performance and a description of the significant events impacting 2009 and thereafter.

RESULTS OF OPERATIONS provides an analysis of the consolidated results of operations for 2009 compared to 2008.

LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, financing, contractual obligations, and liquidity outlook.

CRITICAL ACCOUNTING POLICIES provides a discussion of our accounting policies that require critical judgment, assumptions and estimates.

RECENT ACCOUNTING STANDARDS by reference to Note 1 to the Consolidated Financial Statements provides a description of accounting standards which we have not yet been required to implement and may be applicable to our operations, as well as those significant accounting standards which were adopted during 2009.

OVERVIEW

Our Business

BIO-key develops and markets advanced fingerprint identification biometric technology and software solutions.

We were among the initial pioneers in developing automated, finger identification technology that can be used without the aid of non-automated methods of identification such as a personal identification, password, token, smart card, ID card, credit card, passport, driver’s license or other form of possession or knowledge based identification. This advanced BIO-key™ identification technology improves both the accuracy and speed of finger-based biometrics.

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PacketCluster mobile information software is integrated with 50 separate State/NCIC databases, as well as other state, local and federal databases.

In 2009, BIO-key completed a transaction with InterAct911 Mobile Systems, Inc. (InterAct911), a subsidiary of InterAct911 Corporation, in which InterAct911 acquired substantially all the assets related to the Company’s Law Enforcement division.

A detailed analysis of operations can be found below.

RESULTS OF OPERATIONS

Consolidated Results of Operations

Two Year % trend

	Years ended December 31,
	2009		2008
Revenues
Services	20	%	6	%
License fees and other	80	%	94	%
	100	%	100	%
Costs and other expenses
Cost of services	4	%	2	%
Cost of license fees and other	17	%	8	%
	21	%	10	%
Gross Profit	79	%	90	%

Operating expenses
Selling, general and administrative	144	%	111	%
Research, development and engineering	39	%	29	%
	183	%	140	%
Operating loss	-104	%	-50	%

Other income (deductions)
Total other deductions	-9	%	6	%
Net loss from continuing operations	-113	%	-43	%
Net income from discontinued operations	122	%	49	%
Gain (loss) on disposal of discontinued operations	190	%	-2	%
Net income	199	%	4	%

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Revenues and Costs of goods sold

					2009 - 2008
	2009		2008		$ Chg			% Chg

Revenues
Service	482,900		191,515		291,385			152	%
License & other	1,874,382		3,188,027		(1,313,645		)	-41	%
Total Revenue	$	2,357,282	$	3,379,542	$	(1,022,260	)	-30	%

Cost of goods sold
Service	82,594		63,569		19,025			30	%
License & other	421,641		268,589		153,052			57	%
Total COGS	$	504,235	$	332,158	$	172,077		52	%

Revenues

For the year ended December 31, 2009, service revenue increased as the Company continued to bundle maintenance agreements to its expanding customer license base during the period, as well as renewed existing maintenance agreements from its legacy customers during the period. The percentage of service revenue as a proportion of total Biometric revenue increased from approximately 6% to 20% across the two periods reported.

For the year ended December 31, 2009, license and other revenue decreased primarily as a result of non-recurring sales generated from an OEM customer in 2008, however the decrease was offset by additional license revenue from existing customers.

Costs of goods sold

For the year ended December 31, 2009, cost of services increased from the 2008 period due to increased customer support, as needed for the expanding customer base, however the relative percent of service revenue decreased from 33% in 2008 to 17% in 2009. The Company expects these costs will increase in future periods as additional Biometric customers are added.

For the year ended December 31, 2009, cost of license and other increased from the 2008 period, due to an increase in costs for temporary outside services required to support specific customer orders, hardware costs for an increase in hardware orders and third party software costs, driven by a larger customer base.

Selling, general and administrative

					2009 - 2008
	2009		2008		$ Chg			% Chg

Total	$	3,382,613	$	3,758,888	$	(376,275	)	-10	%

The overall decline in the total SG&A costs for the year ended December 31, 2009 as compared to 2008 was attributable to a reduction in intangible amortization by approximately $295,000, payroll expense by $128,000 and a decrease of approximately $69,000 in non-cash compensation charges. The reduction in expenses were offset by increases in legal fees related to the Settlement Agreement by $30,000, and commission expenses of approximately $72,000.

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Research, development and engineering

					2009 - 2008
	2009		2008		$ Chg			% Chg

Total	$	927,241	$	974,182	$	(46,941	)	-5	%

For the year ended December 31, 2009, R & D costs decreased as compared to 2008, primarily due to lower consultant expenses, offset by in increase in non-cash compensation charges.

Other income and expense

							2009 - 2008
	2009			2008			$ Chg			% Chg

Interest income (expense)	$	89,804		$	(2,552	)	$	92,356		-3619	%
Derivative and warrant fair value adjustments	(286,492		)	93,059			(379,551		)	-408	%
Gain on sale of investments	—			119,348			(119,348		)	-100	%
Other expense	(9,393		)	—			(9,393		)	N/A

	$	(206,081	)	$	209,855		$	(415,936	)	-198	%

For the year ended December 31, 2009, the increase in interest income was a result of the Company releasing unclaimed penalty reserves from prior years. Interest expense includes actual cash paid for interest as well as non-cash interest charges for the amortization of debt discounts, deferred charges, and deferred rent. The majority of interest expense for 2009 and 2008 was associated with Notes Payable (Note L).

For the year ended December 31, 2009, derivative and warrant fair value adjustments decreased, when compared to the 2008 period, due to changes in the fair market value of embedded derivatives and detachable warrants issued with convertible debt in 2004, 2005, and 2009, as well as with additional derivatives recorded as a result of financings in 2006 and 2009. The fair value of the instruments 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 debt at different points in time. Stock price is the major driver behind the movement in the Company’s balances. As our stock price increased during 2009, the value of these instruments also increased, leading to and adjustment to other expenses; the opposite effect occurred during the 2008 period, as our stock price decreased, leading to a reduction in the value of these instruments, and an adjustment to other income.

For the year ended December 31, 2008 , gain on sale of investments related to the realization of “available-for-sale” securities sold at its market value.

DISCONTINUED OPERATIONS

On December 8, 2009, we completed the sale of our Law Enforcement division for approximately $11.3 million, amounting to a net gain to the Company of approximately $4.5 million. This business had previously been reported as a separate segment in our financial statements. For the fiscal years ended 2009 and 2008, $2.9 million, and $1.7 million of operating income, respectively, net of tax, were reflected as discontinued operations in the accompanying consolidated statements of operations. Net sales associated with the discontinued operations were $8.6 million, and $9.5 million for 2009 and 2008, respectively. See “Note B — Discontinued Operations” for further discussion.

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LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES OVERVIEW

Net cash used for operations during the year ended December 31, 2009 was approximately $1,655,000. The cash used by operating activities of continuing operations was primarily due to the following items:

· Negative cash flows related to a decrease in accounts receivable, and deferred revenue of approximately $757,000, and $468,000, respectively (net outflow of $1,225,000),

· Negative cash flows from payments with respect to the note payable, and a decrease in accrued liabilities of approximately $268,000,

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 year ended December 31, 2009:

· The Company issued notes in 2005, 2006, and 2009 and preferred stock in 2009, all of which contained embedded derivatives, and associated warrants. In 2009, the Company recognized losses of approximately $286,000 related to the decrease in value of the derivatives and associated warrants. The decrease in value is driven mainly by the decline in value of the underlying BIO-key stock,

· The Company recorded approximately $222,000 of charges in 2009 for the expense of issuing options to employees for services.

INVESTING ACTIVITIES OVERVIEW

Net cash provided by investing activities for the year ended December 31, 2009 was approximately $6,941,000. The cash provided by investing activities for continuing operations was primarily driven by the net cash proceeds from the sale of the Law Enforcement division of approximately $7,000,000.

FINANCING ACTIVITIES OVERVIEW

Net cash used by financing activities for the year ended December 31, 2009 was approximately $6,206,000. The cash provided by financing activities of continuing operations was primarily due to the following items:

· Negative cash flows related to payment of short term obligations of approximately $3,915,000, partially offset by proceeds from the issuance of short term obligations of $1,750,000 (net outflow of $2,165,000),

· Negative cash flows from the redemption of redeemable preferred stock of approximately $4,004,000.

Net working capital of continuing operations at December 31, 2009 was approximately $868,000 as compared to approximately $283,000 at December 31, 2008, the improvement of which was driven mainly by the Company’s restructuring of its balance sheet following the sale of the Law Enforcement division.

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.

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

Liquidity outlook

At December 31, 2009, our total of cash and cash equivalents was approximately $792,000, as compared to approximately $1,713,000 at December 31, 2008.

As discussed above, the Company has financed itself in the past through access to the capital markets by issuing convertible debt securities, convertible preferred stock and common stock. We currently require approximately $400,000 per month to conduct our operations. During 2009, we generated approximately $2,400,000 of revenue. While the Company expects to increase revenue in 2010, there can be no assurance that we will achieve that goal.

The Company expects to receive $4 million from the maker of its Note Receivable in three equal annual instalments commencing December 2010. These cash inflows shall be partially offset by approximately $3.1 million due to the anticipated redemption of the outstanding balance of the Company’s redeemable preferred stock.

Due to several factors, including our history of losses and limited revenue, our 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. To the extent that we require such 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 unavailable 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.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have, or are in the opinion of management reasonably likely to have, a current or future effect on our financial condition or results of operations. In 2008 the Company extended its property lease at its Marlborough, MA location. Pursuant to the agreement BIO-key was to maintain a security deposit in the form of an irrevocable letter of credit in the amount of $40,500. However, BIO-key and the landlord for the property subsequently agreed to have BIO-key place the funds in a third party escrow account, to be returned at the conclusion of the lease term, in August 2011. Pursuant to the sale of the Company’s Law Enforcement to InterAct911 in December 2009 (see “Note B — Discontinued Operations”), the Company is no longer situated at this location, and expects to fully assign the obligations of the Marlborough premises in early 2010. Accordingly, the balance is recorded as the current asset, “Restricted cash” as at December 31, 2009.

CRITICAL ACCOUNTING POLICIES

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and

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assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this Annual Report on Form 10-K.

We believe that of our significant accounting policies, which are described in Note A of the notes to our consolidated financial statements included in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

1. Revenue Recognition

Revenues from software licensing are recognized in accordance with ASC 985-605, “Software Revenue Recognition. Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

The Company intends to enter into arrangements with end users for items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain.

Multiple-Element Arrangements: For multiple-element arrangements, each element of the arrangement will be analyzed and the Company will allocate a portion of the total fee under the arrangement to the elements using vendor specific objective evidence of fair value of the element, regardless of any separate prices stated within the contract for each element. Vendor specific objective evidence is based on the price the customer is required to pay when the element is sold separately (i.e., software license fees charged when consulting or other services are not provided, hourly rates charged for consulting services when sold separately from a software license). If vendor specific objective evidence of fair value does not exist for any undelivered elements, all revenue is deferred and recognized ratably over the service period if the undelivered element is services, or until sufficient objective evidence of fair value exists or all elements have been delivered.

License Revenues: Amounts allocated to license revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met.

Revenue from licensing software, which requires significant customization and modification, is recognized using the percentage of completion method, based on the hours of effort incurred by the company in relation to the total estimated hours to complete. In instances where third party hardware, software or services form a significant portion of a customer’s contract, the company recognizes revenue for the element of software customization by the percentage of completion method described above. Third party hardware, software, and services are recognized upon shipment or acceptance as appropriate. If the company makes different judgments or utilizes different estimates of the total amount of work expected to be required to customize or modify the software, the timing and revenue recognition, from period to period, and the margins on the project in the reporting period, may differ materially from amounts reported. Anticipated contract losses are recognized as soon as they become known and are estimable.

Service Revenues: Revenues from services are comprised of maintenance and consulting and implementation services. Maintenance revenues include providing for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. Consulting services are generally sold on a time-and-materials basis and include a range of services including installation of software and assisting in the design of interfaces to allow the software to operate in customized environments. Services are generally separable from other elements under the arrangement since performance of the services are not essential to the functionality of any other element of the transaction and are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services. Revenues from services are generally recognized as the services are performed.

The Company provides customers, free of charge or at a minimal cost, testing kits which potential licensing customers may use to test compatibility/acceptance of the Company’s technology with the customer’s intended applications.

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Costs and other expenses: I ncludes professional compensation and other direct contract expenses, as well as costs attributable to the support of client service professional staff, depreciation and amortization costs related to assets used in revenue-generating activities, and other costs attributable to serving the Company’s client base. Professional compensation consists of payroll costs and related benefits including stock-based compensation and bonuses. Other direct contract expenses include costs directly attributable to client engagements, such as out-of-pocket costs including travel and subsistence for client service professional staff, costs of hardware and software and costs of subcontractors. The allocation of lease and facilities charges for occupied offices are included in costs of service.

2. Derivative and Warrant financial instruments

In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument asset or liability.

Our derivative instrument liability is re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For options, warrants and bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black-Scholes or Binomial option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.

3.Impairment or Disposal of Long Lived Assets, including Intangible Assets

We review our long-lived assets, including intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate. If such assets are considered impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds their fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. In assessing recoverability, we must make assumptions regarding estimated future cash flows and discount factors. If these estimates or related assumptions change in the future, we may be required to record impairment charges. Intangible assets with determinable lives are amortized over their estimated useful lives, based upon the pattern in which the expected benefits will be realized, or on a straight-line basis, whichever is greater. We did not record any impairment charges in any of the years presented.

4. Research and Development Expenditures

Research and development expenses include costs directly attributable to the conduct of research and development programs primarily related to the development of our software products and improving the efficiency and capabilities of our existing software. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, services provided by outside contractors, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation and general support services. All costs associated with research and development are expensed as incurred.

5. Income Taxes

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positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Companies historical performance and estimated future taxable income a full valuation allowance has been established.

6. Accounting for Stock-Based Compensation

The Company accounts for share based compensation in accordance with the provisions of ASC 718-10, “Compensation — Stock Compensation,” 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.

RECENT ACCOUNTING STANDARDS

In September 2009, the FASB issued ASU 2009-13, Multiple Element Arrangements . ASU 2009-13 addresses the determination of when the individual deliverables included in a multiple arrangement may be treated as separate units of accounting. ASU 2009-13 also modifies the manner in which the transaction consideration is allocated across separately identified deliverables and establishes definitions for determining fair value of elements in an arrangement. This standard must be adopted by the Company no later than January 1, 2011 with earlier adoption permitted. The Company is currently evaluating the impact, if any, that this standard update will have on its consolidated financial statements.

In June 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles (the “Codification”). The Codification will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All existing accounting standards are superseded as described in ASC 105-10. All other accounting literature not included in the Codification is non-authoritative. ASC 105-10 is effective for interim and annual periods ending after September 15, 2009. The adoption of ASC 105-10 did not have a material impact on the Company’s financial condition or results of operations.

In May 2009, the FASB issued ASC 855-10, Subsequent Events . ASC 855-10 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855-10 will be effective for interim or annual period ending after June 15, 2009 and will be applied prospectively. The adoption of ASC 855-10 had no impact on the Company’s financial condition or results of operations.

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financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures were required beginning with the quarter ended June 30, 2009. The adoption had no impact on the Company’s financial condition or results of operations.

In February 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R)-a, “ Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (SFAS No. 141(R)-a), now part of ASC 805, which simplifies how entities will be required to account for contingencies arising in business combinations under SFAS 141(R) “ Accounting for Business Combinations ”. FASB decided to amend the guidance SFAS 141(R) to require assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would be accounted for in accordance with FASB Statement No. 5 “ Accounting for Contingencies ” (SFAS 5). The provisions of SFAS No. 141(R)-a are applicable to business combinations consummated after January 1, 2009 for calendar year entities. The adoption of SFAS 141(R)-a) will have an impact on the Company’s accounting for business combinations in connection with any future acquisitions.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See financial statements appearing at pages 42-45 of this report

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

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”)), as of December 31, 2009 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 December 31, 2009, 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 annual report on Form 10-K for the fiscal year ended December 31, 2009 as being adequate to provide such assurance.

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Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our CEO and CFO, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009, based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2009. Our management reached this conclusion after identifying the following two areas of material weakness in our internal control systems:

i Inadequate and ineffective application of complex accounting; and

ii Management did not sufficiently monitor internal control over financial reporting. Specifically the Company did not have sufficient personnel with an appropriate level of technical accounting knowledge and experience who could execute appropriate application of complex accounting with respect to derivatives, warrants and stock option modification.

Remediation plans include soliciting additional experts necessary to help ensure the accuracy of the complex accounting financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended December 31, 2009, the Company’s acting Chief Financial Officer, Thomas Colatosti was replaced by Cecilia Welch.

During the fiscal quarter ended December 31, 2009, the Company supplemented its review and reporting structure through the use of outside experts to assist in the preparation of the Company’s annual report. The outside experts have also assisted with the review and testing of the Company’s internal control over financial reporting as of December 31, 2009.

ITEM 9B. OTHER INFORMATION

None .

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following sets forth certain information about each director and executive officer of the Company.

NAME	AGE	POSITIONS HELD
Thomas J. Colatosti	61	Chairman of the Board of Directors
Michael W. DePasquale	55	Chief Executive Officer and Director
Jeffrey J. May (b)	50	Director
Charles P. Romeo(a) (c)	68	Director
John Schoenherr (b) (c)	57	Director

Cecilia Welch	50	Chief Financial Officer
Randy Fodero	51	Vice President of Sales
Mira K. LaCous	48	Vice President of Technology & Development
Charles “Bud” Yanak	53	Vice President of Marketing

(a) From April 2004 to February 2005, Mr. Romeo was employed by the Company.

(b) Audit Committee Member

The following is a brief summary of the business experience of each of the above-named individuals:

THOMAS J. COLATOSTI has served as a Director of the Company since September 2002, as Chairman of the Board since January 3, 2003, and as Chief Financial Officer from November 17, 2008 to December 21, 2009. Mr. Colatosti also served as Co-Chief Executive Officer of the Company from July 2005 to August 2006. Mr. Colatosti also currently serves as the Chief Executive Officer of American Security Ventures, a Lexington, Massachusetts-based consulting firm he founded which specializes in providing strategic management consulting services to emerging and developing companies in the homeland security industry. Since July 2009, Mr. Colatosti has been serving as Chairman of Commodore Applied Technologies. Mr. Colatosti has served as a Director and President of Good Harbor Partners Acquisition Corp., a publicly-traded special purpose acquisition company formed to acquire businesses in the security sectors. From 1997 through June 2002, Mr. Colatosti served as the Chief Executive Officer of Viisage Technology, Inc., a publicly traded biometric technology company. Between 1995 and 1997, Mr. Colatosti served as President and Chief Executive Officer of CIS Corporation. Prior to CIS, Mr. Colatosti had a 21 year career with Digital Equipment Corporation. Among his executive positions he was Vice President and General Manager of the company’s $1.2 billion Government Systems Division. Mr. Colatosti is considered a security industry authority.

MICHAEL W. DEPASQUALE has served as the Chief Executive Officer and a Director of the Company since January 3, 2003. He served as Co-Chief Executive Officer of the Company from July 2005 to August 2006. Mr. DePasquale brings more than 26 years of executive management, sales and marketing experience to the Company. Prior to joining BIO-key, Mr. DePasquale served as the President and Chief Executive Officer of Prism eSolutions, Inc., a Pennsylvania-based provider of professional consulting services and online solutions for ISO-9001/14000 certification for customers in manufacturing, healthcare and government markets, since February 2001. From December 1999 through December 2000, Mr. DePasquale served as Group Vice President for WRC Media, a New York-based distributor of supplemental education products and software. From January 1996 until December 1999, Mr. DePasquale served as Senior Vice President of Jostens Learning Corp., a California-based provider of multi media curriculum. Prior to Jostes, Mr. DePasquale held sales and marketing management positions with McGraw-Hill and Digital Equipment Corporation. Mr. DePasquale earned a Bachelor of Science degree from the New Jersey Institute of Technology.

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JEFFREY J. MAY has served as a Director of the Company since October 29, 2001. Since December 2006, Mr. May has served as the CEO and Director of MagnaLynx, a semiconductor company specializing in high speed chip level communications. Since 1997, Mr. May has served as the President of Gideons Point Capital, a Minnesota-based investment and consulting firm focusing on assisting start-up technology companies. In 1983, Mr. May co-found Advantek, Inc., a manufacturer of equipment and materials for the semiconductor industry, which was sold in 1993. Mr. May continued to serve as a director and Vice-President of Operations of Advantek until 1997, when it had over 600 employees and sales in excess of $100 million. Mr. May earned a Bachelor of Science degree in Electrical Engineering from the University of Minnesota in 1983.

CHARLES P. ROMEO has served as a director of the Company since February 28, 2005 and from January 29, 2003 to April 19, 2004. From April 2004 until February 2005, he served as Vice President of Sales, Public Safety Division of the Company. From November 2005 to November 2007, Mr. Romeo served as the Vice President of Sales and Marketing for UNICOM, a Rhode Island systems integrator. From September 2002 until April 2004 Mr. Romeo has served as the President and Chief Executive Officer of FreedomBridge Technologies, Inc., a Rhode Island-based consulting firm to technology companies in the homeland security industry specializing in implementing direct and channel selling programs, strategic alliances and partnerships in the law enforcement market. Prior to founding FreeedomBridge, Mr. Romeo had a 33 year sales and marketing management career with Digital Equipment Corporation, Compaq Computer Corporation and Hewlett Packard. During his career, Mr. Romeo served as Vice President of Service Sales for a $500 million business unit, and Director of Public Sector Sales, a $275 million division of Hewlett Packard. Mr. Romeo authored The Sales Manager’s Troubleshooter, Prentice Hall 1998, which was named as one of the “top 10 must reads” by Sales and Marketing Magazine. Mr. Romeo earned a Bachelor of Science degree in Mathematics and Economics from the University of Massachusetts and an Executive MBA from Babson College.

JOHN SCHOENHERR has served as a Director of the Company since December 30, 2004. Mr. Schoenherr served as Vice President of Corporate Performance Management for Oracle Corporation from 1995 through 2006. Prior to Oracle he served as Senior Vice President of Business Intelligence and Analytics at Information Resources, Inc. Mr. Schoenherr has over 25 years of experience in the area of business intelligence and strategic planning. His career includes a number of product development and management positions.

CECILIA WELCH has served as Chief Financial Officer of the Company since December 21, 2009. Ms. Welch joined the Company in 2007 and has served since then as the Company’s Corporate Controller. Prior to joining the Company, from January 2006 to December 2006 she was the Controller for Savaje Technologies (acquired by Sun Microsystems), a developer of advanced mobile telephone software. From October 2004 to January 2006, she was Controller for Crystal Systems, a manufacturer of sapphire crystals used for industrial, semiconductor, defense and medical applications. From December 1988 to July 2004, she was the Controller for ATN Microwave (acquired by Agilent Technologies), a manufacturer of automated test equipment. Ms. Welch has a Bachelor’s degree in Accounting from Franklin Pierce University.

RANDY FODERO has served as the Vice President of Sales since February 1, 2006. From July 2005 until February 2006, he was a sales consultant to the Company. Between July 2003 and July 2005, Mr. Fodero was the Vice President of Sales and Marketing, and from March 2003 to July 2003 Mr. Fodero was a member of the Company’s sales organization. Mr. Fodero has more than 20 years of successful executive and sales management experience. Prior to joining the Company, Mr. Fodero served as Director of Global Accounts for Veritas Software from February 2002 until January 2003. Between 1999 and February 2002, Mr. Fodero served in executive sales capacities with companies in the enterprise software industry, including Agile Software, and Memco Software, a leading provider of information security software to Fortune 1000 companies, where he was instrumental in increasing sales and enhancing shareholder value in connection with the sale of Memco to Platinum Technology. From 1990 through 1998, Mr. Fodero served as Vice President of Sales of CommVault Systems, where he grew sales from startup to over $36 million and participated in a management buyout.

MIRA K. LACOUS has served as Vice President of Technology & Development of the Company since May 15, 2000. Ms. LaCous has over 26 years of software development/architecture and project management experience with a background that includes successfully bringing numerous technologies to market, including automated voice response systems, automated building control systems, software piracy protection, intranet training materials and testing, page layout and design software, image scanning software and systems, biometric security, biometric algorithms and more. Ms. LaCous is also the author of five US Patented technologies, multiple international patents, and other patent pending solutions. She has been an officer or director of two other companies; National Computer Systems (NCS), and TEL-Line Systems. Ms. LaCous has a Bachelors in

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Computer Science from North Dakota State University. Ms. LaCous also serves on the Board of Directors of the Minnesota Sinfonia, a not-for-profit arts organization, as its chairperson.

CHARLES “BUD” YANAK has served as Vice President of Marketing of the Company since July 1, 2004. Mr. Yanak has more than 25 years of experience leading the successful development, commercialization, marketing and licensing of technology for security, electronics and industrial companies. He has held executive-level marketing positions at organizations including Iridian Inc. as VP of Marketing and Business Development, a leading biometric company; Avery Dennison, a global supplier of barcode identification systems; and Mars Electronics Industrial Products Group. Most recently, Yanak was vice president of sales and marketing for BioLink Technologies, an enterprise security company. Mr. Yanak has a BS and MS in Engineering from Drexel University and an MBA from Temple University.

Directors’ Terms of Office

Mr. May was initially elected to serve as a director in 2001, and was re-elected in 2004. Mr. Colatosti was initially elected to serve as a director in 2002, and was re-elected in 2004. Mr. DePasquale was initially elected as a director in 2003, and was re-elected in 2004. Mr. Schoenherr was initially elected as a director in 2004. Mr. Romeo was initially elected as a director in 2005. Each such director was elected to serve until the Company’s next annual meeting or until his successor is duly elected and qualified in accordance with the By-laws of the Company.

Audit Committee

The Audit Committee is comprised of John Schoenherr and Jeffrey J. May, who may not qualify as “audit committee financial experts” under the applicable rules adopted by the Securities and Exchange Commission. However, the Board believes that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the Audit Committee. Additionally, the Audit Committee has the ability on its own to retain independent accountants or consultants whenever it deems appropriate.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s officers and directors and persons who own more than ten percent (10%) of the Company’s Common Stock to file with the Securities and Exchange Commission (“SEC”) initial reports of ownership and reports of changes in ownership of the Company’s Common Stock. Such officers, directors and ten percent (10%) stockholders are also required by applicable SEC rules to furnish the Company with copies of all forms filed with the SEC pursuant to Section 16(a) of the Exchange Act. Based solely on its review of the copies of such forms received by it, or written representations from such persons that no other reports were required for such persons, the Company believes that during the fiscal year ended December 31, 2009, all Section 16(a) filing requirements applicable to the Company’s officers, directors and ten percent (10%) stockholders were satisfied in a timely fashion, except for the following:

a) Thomas J. Colatosti — one late Form 4 filing with respect to the issuance of a total of 50,000 options on February 27, 2009.

b) Michael DePasquale — one late Form 4 filing with respect to the issuance of a total of 500,000 options on February 27, 2009.

c) Jeff May — one late Form 4 filing with respect to the issuance of a total of 75,000 options on February 27, 2009.

d) Charles Romeo — one late Form 4 filing with respect to the issuance of a total of 50,000 options on February 27, 2009.

e) John Schoenherr — one late Form 4 filing with respect to the issuance of a total of 100,000 options on February 27,

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2009.

Code of Ethics

We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications; (iii) compliance with applicable governmental laws, rules, and regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code. Any person may obtain a copy of our Code of Ethics free of charge by sending a written request for such to the attention of the Chief Financial Officer of the Company, 3349 Highway 138, Building D Suite B, Wall, NJ 07719.

Internet Address and SEC Reports

We maintain a website with the address www.BIO-key.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K (and, where applicable, 10-KSB), Quarterly Reports on Form 10-Q (and, where applicable, 10-QSB) and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. Our SEC filings are also available over the Internet at the SEC’s website www.sec.gov. Members of the public may read and copy any materials the Company files with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the public reference room is available by calling the SEC on 1800-SEC-0330.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation paid to or accrued by our chief executive officer (principal executive officer) and the two most highly compensated executive officers other than the principal executive officer, who were serving as executive officers at the end of December 31, 2009, for the fiscal years ended December 31, 2009 and 2008:

SUMMARY COMPENSATION TABLE

Name		Fiscal Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)		Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)

Michael W. DePasquale		2009	250,000	—	—	93,976	(1)	—	—	425	344,401
Chief Executive Officer		2008	250,000	—	—	—	(1)	—	—	775	250,775

Randy Fodero		2009	170,000	—	—	34,938	(1)	35,339	—	300	240,577
Vice President Sales		2008	170,000	—	—	—	(1)	54,916	—	527	225,443

Mira K. LaCous		2009	145,665	—	—	—	(1)	—	—	248	145,913
Vice President Technology & Development		2008	140,400	—	—	8,421	(1)	—	—	435	149,256

Thomas J. Colatosti	(2)	2009	150,000	—	—	74,691	(1)	—	—	—	224,691
Former Chief Financial Officer		2008	109,500	—	—	10,874	(1)	—	—	—	120,374

(1) The aggregate grant date fair value of the option awards was estimated using the Black-Scholes option pricing model, with the assumptions listed in Note A to the Company’s financial statements. The amount shown in this column

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represents the grant date fair value calculated under ASC 718

(2) The compensation for Thomas J. Colatosti is presented in the above table pursuant to Item 402 (m)(2)(iii) of the Non-Financial Statement Disclosure requirements of Regulation S-K, as he would have been classified as one of Company’s two most highly compensated executive officers other than the principal executive officer but for the fact that he was not serving as an executive officer at the end of the last completed fiscal year.

Narrative Disclosure to Summary Compensation Table

Compensation for BIO-key’s executives is comprised of three main components: base salary, annual performance-based cash bonus and long-term equity awards. We do not target a specific weighting of these three components or use a prescribed formula to establish pay levels. Rather, the board of directors and compensation committee considers changes in the business, external market factors and our financial position each year when determining pay levels and allocating between long-term and current compensation for the named executive officers.

Cash compensation is comprised of base salary and an annual performance-based cash bonus opportunity. The committee generally seeks to set a named executive officer’s targeted total cash compensation opportunity within a range that is the average of the applicable peer company and/or general industry compensation survey data, adjusted as appropriate for individual performance and internal pay equity and labor market conditions.

In setting cash compensation levels, we favor a balance in which base salaries are generally targeted at slightly below the peer average and a bonus opportunity that is targeted at slightly above the average. The committee believes that this higher emphasis on performance-based cash bonuses places an appropriate linkage between a named executive officer’s pay, his or her individual performance and the achievement of specific business goals by placing a higher proportion of annual cash compensation at risk, thereby aligning executive opportunity with the interests of stockholders.

We include an equity component as part of our compensation package because we believe that equity-based compensation aligns the long-term interests of our named executive officers with those of stockholders.

These cash and equity compensation components of pay are supplemented by various benefit plans that provide health, life, accident, disability and severance benefits, most of which are the same as the benefits provided to all of our US based employees.

Employment Agreements

Effective as of March 25, 2010, the Company entered into a one-year employment agreement with Michael W. DePasquale to serve as the Chief Executive Officer of the Company at an annual base salary of $250,000, subject to adjustment by the Board or Compensation Committee. The agreement automatically renews for subsequent one-year terms, unless terminated by either party. In addition to the Base Salary, a “Performance Bonus” may be awarded to Mr. DePasquale on the basis of the Company achieving certain corporate and strategic performance goals, as determined by the Board in its sole discretion. There is a Change of Control provision that occurs if Mr. Depasquale is not offered continued employment with the Company or any successor, or within five years following such Change of Control, the Company or any successor terminates the Mr. Depasquale’s employment without Cause, then Mr. Depasquale is to be paid his Base Salary and benefits earned but unpaid through the date of termination, and any prorated bonus earned during the then current bonus year, plus two times his then current Base Salary. The employment agreement contains standard and customary confidentiality, non-solicitation and “work made for hire” provisions as well as a covenant not to compete which prohibits Mr. DePasquale from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of his employment and for the one year period thereafter. This agreement also contains a number of termination provisions as described in “Termination and Change in Control Arrangements” in this Item.

On November 20, 2009, the Company renewed its one-year employment agreement with Mira K. LaCous to serve as the Vice President of Technology & Development of the Company at an annual base salary of $140,000, subject to adjustment by the Board or Compensation Committee. The employment agreement contains standard and customary confidentiality, technical invention provisions, as well as a covenant not to compete which prohibits Ms. LaCous from doing business with any current or prospective customer of the Company or engaging in a business competitive with that of the Company during the term of her employment and for the one year period thereafter. This agreement also contains a number of termination provisions as described in “Termination and Change in Control Arrangements” in this Item.

In connection with his appointment to the Board of Directors in September 2002, and as acting Chief Financial Officer from November 2008 to December 2009, the Company has entered into a number of consulting arrangements with Thomas Colatosti. Under the most recent arrangement, which was entered into on January 12, 2010, Mr. Colatosti is to provide services to the Company and its subsidiaries and affiliates for a two year term ending December 31, 2011 at a rate of $5,000 per month. The employment agreement contains standard and customary confidentiality and intellectual property provisions. This agreement also contains a number of termination provisions as described in “Termination and Change in Control Arrangements” in this Item.

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Stock Option Grants

In the event of any change in the outstanding shares of our common stock by reason of a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, transfer of assets, reorganization, conversion or what the board deems to be similar circumstances, the number and kind of shares subject to outstanding options, and the exercise price of such options shall be appropriately adjusted in a manner to be determined in the sole discretion of the board. Furthermore, these option agreements contain a change of control provision as described in “Termination Arrangements” in this Item.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
DECEMBER 31, 2009

The following table sets forth for each named executive officer, information regarding outstanding equity awards as at December 31, 2009:

	Option Awards							Stock Awards
Name	Number of securities underlying unexercised options exercisable (#)		Number of securities underlying unexercised options unexercisable (#)		Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)	Option exercise price ($)	Option expiration date	Number of shares or units of stock that have not vested (#)	Market value of shares or units of stock that have not vested ($)	Equity incentive plan awards: Number of unearned shares or units or other rights that have not vested (#)	Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)

Michael W. DePasquale	500,000		—		—	0.087	2/27/2016	—	—	—	—
	601,938		—		—	0.300	11/2/2012	—	—	—	—

Randy Fodero	340,000		—		—	0.300	11/2/2012	—	—	—	—

Mira LaCous	37,500	(1)	37,500	(1)	—	0.180	8/13/2015	—	—	—	—
	45,000		—		—	0.470	7/18/2010	—	—	—	—

Thomas J. Colatosti	—	(2)	50,000	(2)	—	0.087	2/27/2016	—	—	—	—
	90,241	(3)	25,000	(3)	—	0.110	4/18/2015	—	—	—	—
	384,164		—		—	0.300	11/2/2012	—	—	—	—

(1)	The options vest equally in two annual installments commencing August 13, 2009; 37,500 vested on August 13, 2009; 37,500 will vest on August 13, 2010

(2)	The options vest equally in two annual installments commencing February 27, 2010

(3)	65,241 of the options vested upon grant and the remaining options vest equally thereafter in two annual installments commencing April 18, 2009; 25,000 vested on April 18, 2009; 25,000 will vest on April 18, 2010

Narrative Disclosure to Outstanding Equity Awards at Fiscal Year End Table

The following are the material terms of each agreement, contract, plan or arrangement that provide for payments to one or more of our named executive officers at, following or pursuant to their resignation, retirement or termination, or in connection with a change in control of the Company.

Termination Arrangements

Effective as of March 25, 2010, the Company entered into a one-year employment agreement with Michael W. DePasquale to serve as the Chief Executive Officer of the Company. The Company may terminate the agreement at any time with or without cause. In the event of termination without cause, Mr. DePasquale shall continue to be paid his then current base salary for the greater of nine months from the date of such termination or the number of months remaining until the end of the term of the employment agreement. There is a Change of Control provision that occurs if Mr. Depasquale is not offered continued employment with the Company or any successor, or within five years following such Change of Control, the Company or any successor terminates the Mr. Depasquale’s employment without Cause, then Mr. Depasquale is to be paid his Base Salary and benefits earned but unpaid through the date of termination, and any prorated bonus earned during the then current bonus year, plus two times his then current Base Salary.

On November 20, 2009, the Company renewed the annual agreement with Mira K. LaCous to serve as the Vice President of Technology & Development of the Company. The Company may terminate the agreement at any time with or without cause. In the event of termination without cause, Ms. LaCous shall continue to be paid her then current base salary for six months from the date of such termination.

On January 12, 2010, the Company entered into a two-year consulting agreement with Thomas Colatosti to serve as consultant to the Company. The Company may terminate the agreement at any time with or without cause. In the event of termination by the Company, Mr. Colatosti shall continue to be paid his then current base salary for the remaining term of the agreement.

Change in Control Provisions

The Company’s 1996 Stock Option Plan (as amended to date, the “1996 Plan”), 1999 Stock Option Plan and 2004 Stock

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Incentive Plan (the “1999 Plan” and together with the 1996 Plan and 2004 Plan, the “Plans”) provide for the acceleration of the vesting of unvested options upon a “Change in Control” of the Company. A Change in Control is defined in the Plans to include (i) a sale or transfer of substantially all of the Company’s assets; (ii) the dissolution or liquidation of the Company; (iii) a merger or consolidation to which the Company is a party and after which the prior shareholders of the Company hold less than 50% of the combined voting power of the surviving corporation’s outstanding securities; (iv) the incumbent directors cease to constitute at least a majority of the Board of Directors; or (v) a change in control of the Company which would otherwise be reportable under Section 13 or 15(d) of the Exchange Act.

In the event of a “Change In Control” each Plan provides for the immediate vesting of all options issued thereunder. The 1999 Plan provides for the Company to deliver written notice to each optionee under the 1999 Plan fifteen (15) days prior to the occurrence of a Change In Control during which all options issued under the 1999 Plan may be exercised. Thereafter, all options issued under the 1999 Plan which are neither assumed or substituted in connection with such transaction, automatically expire unless otherwise determined by the Board. The 1996 Plan provides for all options to remain exercisable for the remainder of their respective terms and permits the Company to make a cash payment to any or all optionees equal to the difference between the exercise price of any or all such options and the fair market value of the Company’s common stock immediately prior to the Change In Control. The 2004 Plan enables the Board to provide that all outstanding options be assumed, or equivalent options be substituted by the acquiring or succeeding corporation upon the occurrence of a “Reorganization Event” as defined. If such Reorganization Event also constitutes a Change in Control, then such assumed or substituted options shall be immediately exercisable in full. If the acquiring or succeeding corporation does not agree to assume, or substitute for such options, then the Board, upon written notice to the Participants, may provide that all unexercised options become exercisable in full as of a specified time prior to the Reorganization Event and terminate prior to the consummation of the Reorganization Event. Alternatively, if under the terms and conditions of the Reorganization Event, holders of common stock will receive a cash payment for their shares, then the Board may provide that all Participants receive a cash payment equal to the difference between the Acquisition Price and the Option Price multiplied by the number of options held by such Participants.

Options issued to executive officers outside of the Plans contain change in control provisions substantially similar to those contained in the 1999 Plan.

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DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2009

The following table sets forth for each director, information regarding their compensation for the year ended December 31, 2009:

Name		Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)		Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Thomas J. Colatosti		—	—	74,691	(2)	—	—	—	74,691
Michael W. DePasquale	(1)	—	—	—		—	—	—	—
Jeffrey J. May		—	—	6,084	(2)	—	—	—	6,084
Charles P. Romeo		—	—	19,144	(2)	—	—	—	19,144
John Schoenherr		—	—	7,408	(2)	—	—	—	7,408

(1) Refer to Narrative Disclosure To Summary Compensation Table for information pertaining to Mr. DePasquale’s employment agreement.

(2) The aggregate grant date fair value of the option awards was estimated using the Black-Scholes option pricing model, with the assumptions listed in Note A to the Company’s financial statements. The amount shown in this column represents the grant date fair value calculated under ASC 718

(3) The aggregate number of stock and option awards outstanding at December 31, 2009 for each of the Company’s directors are the same amounts as are listed in Item 12 “Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters” as at February 15, 2010.

Narrative Disclosure to Director Compensation Table

Directors who are also officers of the Company receive no additional compensation for serving on the Board of Directors. The Company’s current policy is to issue options to purchase 50,000 shares of common stock to each non-employee director on an annual basis. The Chair of the Audit Committee receives options to purchase an additional 50,000 shares of common stock on an annual basis.

On February 27, 2009, Thomas Colatosti, Jeffrey May, Charles Romeo and John Schoenherr were granted options to purchase 50,000, 75,000, 50,000, and 100,000 shares of common stock, respectively, at an exercise price of $0.087 per share. Options totaling 25,000 issued to Jeffrey May, immediately vested on issuance, with the remaining options for all participants to vest in equal increments over two years. The options expire on February 27, 2016.

On November 2, 2009, in conjunction with the sale of the Law Enforcement Division, the Company cancelled options with an exercise price greater than $0.30 per share and exchanged them for options with a $0.30 exercise price. Thomas Colatosti, Jeffrey May, Charles Romeo and John Schoenherr had options for 200,000, 50,000, 400,000 and 50,000 shares of common stock, respectively, at exercise prices ranging from $1.17 to $1.39 per share cancelled and exchanged for options of 45,455, 11,364, 100,938, and 10,791 shares of common stock, respectively, at an exercise price of $0.30 per share. All options immediately vested on issuance. The options expire on November 2, 2012.

We reimburse each of our non-employee directors for their reasonable expenses incurred in connection with attending meetings of the board of directors and related committees.

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ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of February 17, 2010, information with respect to the securities holdings of all persons which the Company, pursuant to filings with the Securities and Exchange Commission, has reason to believe may be deemed the beneficial owners of more than five percent (5%) of the Company’s outstanding common stock. The following table also sets forth, as of such date, the beneficial ownership of the Company’s common stock by all officers and directors, individually and as a group. Unless otherwise indicated, the address of each person listed below is c/o BIO-key International, Inc., 3349 Highway 138, Building D, Suite B, Wall, NJ 07719.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership(1)		Percentage of Class(1)
Thomas J. Colatosti	1,479,405	(2)	1.9	%
Michael W. DePasquale	1,101,938	(3)	1.4	%
Jeffrey May	241,845	(4)	*
Charles P. Romeo	183,558	(5)	*
John Schoenherr	134,721	(6)	*
Randy Fodero	340,000	(7)	*
Cecilia Welch	13,333	(8)	*
Mira LaCous	82,500	(9)	*
Charles Yanik	27,861	(10)	*

All officers and directors as a group (8) persons	3,605,161		4.6	%

* Less than 1%

(1) The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations promulgated under the Securities Exchange Act of 1934 and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of an individual and any other relative who has the same home as such individual, as well as, other securities as to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days through the exercise of options or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on 77,713,398 shares of common stock outstanding as of February 17,2010.

(2) Includes 499,405 shares issuable upon exercise of options and 875,000 shares issuable upon conversion of Series D Redeemable Preferred Stock. Does not include 50,000 shares issuable upon options subject to vesting.

(3,7,10) Consists of shares issuable upon exercise of options.

(4) Consists of 241,845 shares issuable upon exercise of options. Does not include 75,000 shares issuable upon options subject to vesting.

(5) Consists of 183,558 shares issuable upon exercise of options. Does not include 75,000 shares issuable upon options subject to vesting.

(6) Consists of 134,721 shares issuable upon exercise of options. Does not include 75,000 shares issuable upon options subject to vesting.

(8) Consists of 13,333 shares issuable upon exercise of options. Does not include 6,667 shares issuable upon options subject to vesting.

(9) Consists of 82,500 shares issuable upon exercise of options. Does not include 37,500 shares issuable upon options subject to vesting.

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The following table sets forth, as of December 31, 2009, information with respect to securities authorized for issuance under equity compensation plans.

EQUITY COMPENSATION PLAN INFORMATION

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	45,000	$	0.47	—
Equity compensation plans not approved by security holders	3,903,030	$	0.23	1,926,811
Total	3,948,030	$	0.24	1,926,811

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 were 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 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.

As of December 31, 2009, there were outstanding options under the 1996 Plan to purchase 45,000 shares of common stock, and no shares were available for future grants.

The Company’s 1999 Stock Option Plan (the “1999 Plan”) was adopted by the Board of Directors of the Company on or about August 31, 1999. The material terms of the 1999 Plan are summarized below.

The 1999 Plan is currently administered by the Board of Directors of the Company (the “Plan Administrator”). The Plan Administrator is authorized to construe the 1999 Plan and any option issued under the 1999 Plan, select the persons to whom options may be granted, and determine the number of shares to be covered by any option, the exercise price, vesting schedule and other material terms of such option. Under the 1999 Plan 2,000,000 shares of common stock were reserved for issuance to officers, employees, directors and consultants of the Company at exercise prices not less than 85% of the last sale price of the Company’s common stock as reported on the OTC Bulletin Board on the date of grant. Options have terms of not more than 10 years from the date of grant, are subject to vesting as determined by the Plan Administrator and are not transferable without the permission of the Company except by will or the laws of descent and distribution or pursuant to a domestic relations order. Options terminate three (3) months after termination of employment or other association with the Company or one (1) year after termination due to disability, death or retirement. In the event that termination of employment or association is for a cause, as that term is defined in the 1999 Plan, options terminate immediately upon such termination. The Plan Administrator has the discretion to extend options for up to three years from the date of termination or disassociation with the Company.

The 1999 Plan provides for the immediate vesting of all options in the event of a “Change In Control” of the Company. In the event of a Change In Control, the Company is required to deliver written notice to each optionee under the 1999 Plan fifteen (15) days prior to the occurrence of a Change in Control, during which time all options issued under 1999 Plan may be exercised. Thereafter, all options issued under the 1999 Plan which are neither assumed or substituted in connection with such transaction, automatically expire, unless otherwise determined by the Board. Under the 1999 Plan, a “Change In Control” is defined to include (i) a sale or transfer of substantially all of the Company’s assets; (ii) the dissolution or liquidation of the Company; (iii) a merger or consolidation to which the Company is a party and after which the prior shareholders of the Company hold less than 50% of the combined voting power of the surviving corporation’s outstanding securities; (iv) the incumbent directors cease to constitute at least a majority of the Board of Directors; or (v) a change in

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control of the Company which would otherwise be reportable under Section 13 or 15(d) of the Exchange Act. The 1999 Plan expired in August 2009.

As of December 31, 2009, there were outstanding options under the 1999 Plan to purchase 500,000 shares of common stock, and no shares were available for future grants.

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 this 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.

As of December 31, 2009, there were outstanding options under the 2004 Plan to purchase 2,073,189 shares of common stock, and options to purchase an aggregate of 1,926,811 shares were available for future grants.

In addition to options issued under the 1996, 1999 and 2004 Plans, the Company has issued options to employees, officers, directors and consultants to purchase common stock under the non plan. As of December 2009, there were outstanding options under the non plan to purchase 1,329,841 shares of common stock. The terms of these options are substantially similar to the provisions of the 1999 Plan and options issued thereunder.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Employment Arrangements

The Company has entered into employment agreements with Michael W. DePasquale, Mira LaCous, and Thomas J. Colatosti. See “EXECUTIVE COMPENSATION—Employment Agreements.”

Consulting Arrangement with Thomas J. Colatosti

Under the previous arrangement, which was entered into on November 17, 2008, Mr. Colatosti, provided services to the Company and its subsidiaries and affiliates for the year ended November 16, 2009 at a rate of $12,500 per month.

Director Independence

The Board applies the definition of independent director as set forth in NASDAQ Stock Market Rule 4200 (a)(15), as well as Rule 10A-3 under the Securities Exchange Act of 1934, as amended.

In accordance with this guidance, the Board considers Mr. May, Mr. Schoenherr, and Mr. Romeo to be independent. Mr. May and Mr. Schoenherr are the members of the Company’s Audit Committee, while Mr. Schoenherr and Mr. Romeo are the members of the Company’s Compensation Committee.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table shows fees for professional audit services billed to us by CCR LLP (“CCR”) for the audit of our annual consolidated financial statements for the years ended December 31, 2009, and 2008, and fees billed to us by CCR for other services during 2009 and 2008:

	2009		2008
Audit Fees:
CCR	$	110,500	$	148,400

Audit-Related Fees
CCR	20,787		6,800

Tax Fees:
CCR	41,473		51,670

Total Fees	$	172,760	$	206,870

Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by CCR in connection with statutory and regulatory filings or engagements. Audit fees also include fees for services provided in connection with registration of securities, comfort letters, and review of documents filed with the SEC.

Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and which are not reported under audit fees. These services relate primarily to mergers and acquisitions due diligence as well as advisory services as it pertains to the Sarbanes-Oxley Act and related rules and regulations;

Tax Fees consist of fees billed for professional services for tax compliance assistance rendered during the fiscal year.

Audit Committee Pre-Approval Procedures

The Audit Committee of our Board of Directors consists of Jeffrey J. May and John Schoenherr. The Audit Committee approves the engagement of our independent auditors to render audit and non-audit services before they are engaged. All of the fees for 2009 and 2008 shown above were pre-approved by the Audit Committee.

The Audit Committee pre-approves all audit and other permitted non-audit services provided by our independent auditors. Pre-approval is generally provided for up to one year, is detailed as to the particular category of services and is subject to a monetary limit. Our independent auditors and senior management periodically report to the Audit Committee the extent of services provided by the independent auditors in accordance with the pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

Our audit committee will not approve engagements of our independent registered public accounting firm to perform non-audit services for us if doing so will cause our independent registered public accounting firm to cease to be independent within the meaning of applicable SEC rules. In other circumstances, our audit committee considers, among other things, whether our independent registered public accounting firm is able to provide the required services in a more or less effective and efficient manner than other available service providers.

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ITEM 15. EXHIBITS

(a) The following documents are filed as part of this Report. Portions of Item 13 are submitted as separate sections of this Report:

(1) Financial statements filed as part of this Report:

Report of Independent Registered Public Accounting Firm

Balance Sheets as at December 31, 2009 and 2008

Statements of Operations—Years ended December 31, 2009 and 2008

Statement of Stockholders’ Equity (Deficit)—Years ended December 31, 2009 and 2008

Statements of Cash Flows—Years ended December 31, 2009 and 2008

Notes to Financial Statements—December 31, 2009 and 2008

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

ITEM 8—FINANCIAL STATEMENTS

The following financial statements of BIO-key International, Inc. are included herein at the indicated page numbers:

Report of Independent Registered Public Accounting Firm, CCR LLP	41
Balance Sheets as at December 31, 2009 and 2008	42
Statements of Operations—Years ended December 31, 2009 and 2008	43
Statement of Stockholders’ Equity (Deficit)—Years ended December 31, 2009 and 2008	44
Statements of Cash Flows—Years ended December 31, 2009 and 2008	45
Notes to the Financial Statements—December 31, 2009 and 2008	46

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
BIO-key International, Inc.

Westford, MA

We have audited the accompanying consolidated balance sheets of BIO-key International, Inc. and Subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BIO-key International, Inc. and Subsidiary as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in the consolidated financial statements, the Company has suffered substantial net losses in recent years, and has an accumulated deficit at December 31, 2009, which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are disclosed in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ CCR LLP

Westborough, Massachusetts
March 26, 2010

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BIO-key International, Inc and Subsidiary

CONSOLIDATED BALANCE SHEETS

	December 31,
	2009			2008
ASSETS
Cash and cash equivalents	$	792,426		$	1,712,912
Restricted cash	40,500			—
Accounts receivable, net of allowance for doubtful accounts of $11,526 and $5,845 at December 31, 2009 and December 31, 2008, respectively	847,215			96,131
Note receivable, current portion	1,334,000			—
Inventory	14,935			13,159
Prepaid expenses and other	123,911			54,843
Continuing operations total current assets	3,152,987			1,877,045
Discontinued operations total current assets	—			810,708
Equipment and leasehold improvements, net	39,243			25,677
Deposits and other assets	8,712			7,812
Restricted cash	—			40,500
Note receivable, net of current portion	2,666,000			—
Intangible assets—less accumulated amortization	230,259			251,812
Continuing operations total non-current assets	2,944,214			325,801
Discontinued operations total non-current assets	—			8,234,436
TOTAL ASSETS	$	6,097,201		$	11,247,990

LIABILITIES
Accounts payable	$	340,241		$	252,213
Accrued liabilities	708,765			663,567
Deferred revenue	200,996			677,966
Convertible notes, derivatives and warrants	471,483			—
Redeemable preferred stock derivatives	563,599			—
Continuing operations total current liabilities	2,285,084			1,593,746
Discontinued operations total current liabilities	—			5,196,805
Warrants	63,901			12,317
Redeemable preferred stock derivatives	—			439
Deferred revenue	9,391			—
Continuing operations total non-current liabilities	73,292			12,756
Discontinued operations total non-current liabilities	—			19,892
TOTAL LIABILITIES	2,358,376			6,823,199

Commitments and contingencies

Series B redeemable convertible preferred stock: authorized, 1,000,000 shares (liquidation preference of $1 per share); issued and outstanding 0 and 970,612 shares of $.0001 par value at December 31, 2009 and December 31, 2008, respectively	—			1,008,224
Series C redeemable convertible preferred stock: authorized, 600,000 shares (liquidation preference of $10 per share); issued and outstanding 0 and 592,032 shares of $.0001 par value at December 31, 2009 and December 31, 2008, respectively	—			6,498,516
Series D redeemable convertible preferred stock: authorized, 100,000 shares (liquidation preference of $100 per share); issued and outstanding 30,557 and 0 shares of $.0001 par value at December 31, 2009 and December 31, 2008, respectively	2,630,593			—
	2,630,593			7,506,740

STOCKHOLDERS’ EQUITY (DEFICIT):
Series A convertible preferred stock: authorized, 100,000 shares (liquidation preference of $100 per share); issued and outstanding 0 and 30,557 shares of $.0001 par value, at December 31, 2009 and December 31, 2008, respectively	—			3
Common stock — authorized, 170,000,000 shares; issued and outstanding; 77,713,398 and 67,876,880 of $.0001 par value at December 31, 2009 and December 31, 2008, respectively	7,771			6,788
Additional paid-in capital	51,187,754			51,692,103
Accumulated deficit	(50,087,293		)	(54,780,843		)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)	1,108,232			(3,081,949		)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	6,097,201		$	11,247,990

The accompanying notes are an integral part of these statements.

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BIO-key International, Inc. and Subsidiary

STATEMENTS OF OPERATIONS

	Years ended December 31,
	2009			2008

Revenues
Services	$	482,900		$	191,515
License fees and other	1,874,382			3,188,027
	2,357,282			3,379,542
Costs and other expenses
Cost of services	82,594			63,569
Cost of license fees and other	421,641			268,589
	504,235			332,158
Gross Profit	1,853,047			3,047,384

Operating expenses
Selling, general and administrative	3,382,613			3,758,888
Research, development and engineering	927,241			974,182
	4,309,854			4,733,070
Operating loss	(2,456,807		)	(1,685,686		)

Other income (deductions)
Interest income (expense)	89,804			(2,552		)
Derivative and warrant fair value adjustments	(286,492		)	93,059
Gain on sale of investments	—			119,348
Other expense	(9,393		)	—
	(206,081		)	209,855
Loss from continuing operations	(2,662,888		)	(1,475,831		)
Income from discontinued operations	2,872,535			1,660,364
Gain (loss) on disposal of discontinued operations, net of expected tax	4,483,902			(65,354		)
Net Income	$	4,693,549		$	119,179

Loss applicable to common stockholders
Loss from continuing operations	(2,662,888		)	(1,475,831		)
Convertible preferred stock dividends, accretion and redemption gain	(518,749		)	(1,890,503		)
Loss applicable to common stockholders	$	(3,181,637	)	$	(3,366,334	)

Basic and Diluted Earnings per Common Share:
Loss applicable to common stockholders	$	(0.04	)	$	(0.05	)
Income from discontinued operations	0.04			0.02
Gain (loss) on disposal of discontinued operations	0.06			(0.00		)
Net income (loss)	$	0.06		$	(0.03	)

Weighted Average Shares Outstanding:
Basic and Diluted	72,553,586			64,159,473

The accompanying notes are an integral part of these statements.

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BIO-key International, Inc. and Subsidiary

STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

	Series A 7%					Series B 15%					Series C 15%					Series D 7%
	Convertible					Convertible					Convertible					Convertible							Additional
	Preferred Stock					Preferred Stock					Preferred Stock					Preferred Stock				Common Stock			Contributed			Accumulated
	Shares		Amount			Shares		Amount			Shares		Amount			Shares	Amount			Shares	Amount		Capital			Deficit			Total
Balance as of December 31, 2007	30,557		$	3		970,612		$	881,340		592,032		$	5,776,231		—	$	—		61,153,202	$	6,115	$	52,126,595		$	(54,900,021	)	$	(2,767,308	)

Accretion of preferred stock discount	—		—			—		126,480			—		449,444			—	—			—	—		(575,924		)	—			(575,924		)
Accretion of preferred stock dividends	—		—			—		148,422			—		905,316			—	—			—	—		(1,053,738		)	—			(1,053,738		)
Accretion of stock issuance costs	—		—			—		—			—		46,247			—	—			—	—		(46,247		)	—			(46,247		)
Conversion of preferred stock and cumulative dividends in arrears into common stock	—		—			—		(148,018		)	—		(678,722		)	—	—			6,723,678	673		826,067			—			826,740
Share-based compensation	—		—			—		—			—		—			—	—			—	—		415,350			—			415,350
Net income	—		—			—		—			—		—			—	—			—	—		—			119,179			119,179

Balance as of December 31, 2008	30,557		$	3		970,612		$	1,008,224		592,032		$	6,498,516		—	$	—		67,876,880	$	6,788	$	51,692,103		$	(54,780,843	)	$	(3,081,948	)

Conversion of Series A to Series D Preferred Stock	(30,557	)	(3		)	—		—			—		—			30,557	3,055,700			—	—		(3,055,697		)	—			(3,055,700		)
Discount on Preferred Stock	—		—			—		—			—		—			—	(430,398		)	—	—		—			—			—
Accretion of preferred stock discount	—		—			—		—			—		—			—	3,509			—	—		(3,509		)	—			(3,509		)
Accretion of preferred stock dividends	—		—			—		128,643			—		827,041			—	1,782			—	—		(957,466		)	—			(957,466		)
Preferred stock dividends paid in cash	—		—			—		(37,207		)	—		—			—	—			—	—		—			—			—
Conversion of preferred stock and cumulative dividends in arrears into common stock	—		—			—		(114,598		)	—		(1,271,154		)	—	—			9,836,518	983		1,384,769			—			1,385,752
Conversion of preferred stock dividends in arrears into Convertible notes	—		—			—		—			—		—			—	—			—	—		(737,957		)	—			(737,957		)
Conversion of preferred stock dividends in arrears into interest payable	—		—			—		(14,450		)	—		(134,083		)	—	—			—	—		23,324			—			23,324
Conversion of preferred stock and cumulative dividends in arrears into note payable	—		—			(520,612	)	(390,459		)	(236,595	)	(1,774,463		)	—	—			—	—		—			—			—
Redemption of preferred stock in cash	—		—			(450,000	)	(450,000		)	(355,437	)	(3,554,370		)	—	—			—	—		—			—			—
Gain on redemption of preferred stock	—		—			—		(130,153		)	—		(591,487		)	—	—			—	—		721,640			—			721,640
Issuance of warrants	—		—			—		—			—		—			—	—			—	—		1,835,000			—			1,835,000
Share-based compensation	—		—			—		—			—		—			—	—			—	—		285,547			—			285,547
Net income	—		—			—		—			—		—			—	—			—	—		—			4,693,549			4,693,549

Balance as of December 31, 2009	—		$	—		—		$	—		—		$	—		30,557	$	2,630,593		77,713,398	$	7,771	$	51,187,754		$	(50,087,293	)	$	1,108,232

The accompanying notes are an integral part of these statements.

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BIO-key International, Inc. and Subsidiary

STATEMENTS OF CASH FLOWS

	Years ended December 31,
	2009			2008

CASH FLOW FROM OPERATING ACTIVITIES:
Net Income	$	4,693,549		$	119,179
Less:
Loss (income) from discontinued operations	(2,872,535		)	709,443
Loss (gain) on disposal of discontinued operations	(4,483,902		)	65,354
Income (loss) from continuing operations	(2,662,888		)	893,976
Adjustments to reconcile net income (loss) to cash used in operating activities:
Derivative and warrant fair value adjustments	286,492			(93,059		)
Gain on sale of investments	—			(119,348		)
Depreciation	29,214			20,779
Amortization
Intangible assets	21,553			12,123
Discounts on convertible debt related to derivatives	5,336			—
Allowance for doubtful receivables	5,681			(942		)
Share-based compensation	222,097			296,379
Change in assets and liabilities:
Accounts receivable trade	(756,765		)	317,744
Inventory	(1,776		)	(8,280		)
Prepaid expenses and other	(69,068		)	(11,892		)
Accounts payable	88,028			(233,078		)
Accrued liabilities	(268,011		)	27,839
Deferred revenue	(467,579		)	(304,663		)
Net cash provided (used) for continuing operations	(3,567,686		)	797,578
Net cash provided (used) for discontinued operations	1,912,970			(668,405		)
Net cash provided (used) for operating activities	(1,654,716		)	129,173
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(42,778		)	—
Deposits	(900		)	(922		)
Proceeds from the sale of the business segment	7,000,000			(65,354		)
Transfer of funds from restricted cash	—			112,594
Proceeds from sale of investments	—			119,348
Proceeds from sale of assets	—			10,530
Net cash provided by continuing operations	6,956,322			176,196
Net cash provided (used) for discontinued operations	(15,593		)	442,769
Net cash provided by investing activities	6,940,729			618,965
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of short term obligations	1,750,000			—
Repayment of short term obligations	(3,914,922		)	—
Preferred stock dividend paid	(37,207		)	—
Redemption of redeemable preferred stock	(4,004,370		)	—
Net cash used for continuing operations	(6,206,499		)	—
Net cash used for discontinued operations	—			—
Net cash used for financing activities	(6,206,499		)	—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(920,486		)	748,138
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	1,712,912			964,774
CASH AND CASH EQUIVALENTS, END OF YEAR	$	792,426		$	1,712,912

The accompanying notes are an integral part of these statements.

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BIO-key International, Inc. and Subsidiary

NOTES TO THE FINANCIAL STATEMENTS

December 31, 2009 and 2008

NOTE A —THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company, founded in 1993, made two strategic acquisitions in 2004. The Company acquired Public Safety Group Inc. (“PSG”) in March, 2004, and the Mobile Government division of Aether Systems, Inc. (“AMG” or “Mobile Government”) in September, 2004.

BIO-key develops and markets proprietary fingerprint identification biometric technology and software solutions. We also deliver advanced identification solutions and information services to law enforcement departments, public safety agencies and other government and private sector customers. Our mobile wireless technology provides first responders with critical, reliable, real-time data and images from local, state and national databases.

Basis of Presentation

We have only recently begun to generate significant revenues and have incurred significant losses to date, and at December 31, 2009, we had an accumulated deficit of approximately $50 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 of America, 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 sheet 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 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.

Summary of Significant Accounting Policies

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

1. Basis of Consolidation

The accompanying 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. Intercompany accounts and transactions have been eliminated in consolidation.

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2. Revenue Recognition

License Revenues: Amounts allocated to license revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met.

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3. Cash and Cash Equivalents

Cash equivalents consist of certificates of deposit and all other liquid investments with original maturities of three months or less. The Company maintains its cash balances in a financial institution in Nevada. These balances are insured by the Federal Deposit Insurance Corporation up to $250,000.

4. Accounts Receivable

Accounts receivable billed and unbilled are carried at original amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful receivables by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

5. Accounting for Acquisitions

Acquisitions are accounted for under the purchase method of accounting, which resulted in recording significant goodwill and other intangible asset balances. The purchase prices are allocated to assets acquired and liabilities assumed at their estimated fair values on the date of the acquisitions, as determined by management, and by appraisals with respect to identifiable intangible assets. Accounting for acquisitions involves significant judgments and estimates regarding fair values of acquired intangible assets, which are based on projections of future revenues and cash flows, assumptions regarding discount factors, royalty rates, tax rates, amortization methodologies and related useful lives. Developed technology (software), copyrighted software, marketing agreements, customer relationships and trademarks are valued using the income approach.

6. Depreciation and Amortization

Depreciation is provided for in amounts relative to the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method. Intangible assets other than patent costs are amortized on the straight-line method over their expected useful lives. Patent costs are capitalized until patents are awarded. Upon award, such costs are amortized over their respective lives. If a patent is denied, all costs are charged to operations in that year. Deferred financing fees related to the issuance of long-term obligations are capitalized and amortized to interest expense over the lives of the related debt using the effective interest rate method.

The estimated useful lives used to compute depreciation and amortization for financial reporting purposes are as follows:

Equipment and leasehold improvements
Equipment		3-5 years
Furniture and fixtures		3-5 years
Software		3 years
Leasehold improvements		life or lease term

Intangible assets
Patents		life

The estimated aggregate amortization expense of intangible assets for the five years following December 31, 2009 is approximately as follows:

Year ending December 31,		($)
2010		12,000
2011		12,000
2012		12,000
2013		12,000
2014		12,000

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7. Derivative and Warrant Financial Instruments

8 .Impairment or Disposal of Long Lived Assets, including Intangible Assets

9. Advertising Expense

The Company expenses the costs of advertising as incurred. Advertising expenses for the years ended December 31, 2009 and 2008, were approximately $72,000 and $55,000, respectively.

10. Deferred Revenue

Deferred revenue includes customer advances and amounts that have been billed per the contractual terms but have not been recognized as revenue. The majority of these amounts are related to maintenance contracts for which the revenue is recognized ratably over the applicable term, which generally is 12 months from the date the customer accepts the products.

11. Research and Development Expenditures

12. Earnings Per Share of Common Stock

Earnings per share of common stock-basic is computed by dividing net income applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Earnings per share of common stock-assuming dilution reflects the maximum potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and would then share in the net income of the company. See Note V - Earnings Per Share “EPS”, for additional information.

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13. Accounting for Stock-Based Compensation

The compensation expense recognized under ASC 718 increased the Company’s loss from continuing operations by $222,097 and $296,379 with no effect per share (basic and diluted), for the years ended December 31, 2009 and 2008 respectively.

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

	Year ended December 31,
	2009		2008

Cost of services	$	—	$	11,275
Selling, general and administrative	198,201		270,073
Research, development and engineering	23,896		15,031
	$	222,097	$	296,379

Valuation Assumptions for Stock Options

For the years ended December 31, 2009 and 2008, 3,019,258 and 759,272 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:

	Year ended December 31,
	2009		2008
Risk free interest rate	0.61-3.00	%	2.95-3.72	%
Expected life of options (in years)	1.42-6.34		4.5
Expected dividends	0	%	0	%
Volatility of stock price	87-123	%	87-88	%

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

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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.

14. Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Because of the Companies historical performance and estimated future taxable income a full valuation allowance has been established.

The Company accounts for uncertain tax positions in accordance with ASC 740-10 . During the year ended December 31, 2009, the Company released approximately $100,000 in its gross allowance for uncertain tax positions due to decreased accumulated tax losses resulting from the Company earning taxable income in 2008.

15. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Estimates and assumptions which, in the opinion of management are used in accounting for, among other things, long-term contracts, allowances for uncollectible receivables, recoverability of goodwill and other long-lived assets, depreciation and amortization, valuation of deferred income taxes, convertible notes and related discounts, embedded derivates, preferred stock, share-based compensation, and warrants outstanding.

16. Comprehensive Income/(Loss)

Comprehensive income (loss) consists of net loss and other gains and losses affecting shareholders’ equity (deficit) that, under generally accepted accounting principles, are excluded from net income (loss) in accordance with ASC 220. The Company, however, does not have any components of other comprehensive income (loss) as defined by ASC 220 and therefore, for the years ended December 31, 2009 and 2008, comprehensive income (loss) is equivalent to the Company’s reported net income (loss). Accordingly, a separate statement of comprehensive income (loss) is not presented.

17. Recent Accounting Pronouncements

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not included in the Codification is non-authoritative. ASC 105-10 is effective for interim and annual periods ending after September 15, 2009. The adoption of ASC 105-10 did not have a material impact on the Company’s financial condition or results of operations.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which is now part of ASC 825. This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures were required beginning with the quarter ended June 30, 2009. The adoption had no impact on the Company’s financial condition or results of operations.

NOTE B—DISCONTINUED OPERATIONS

Law Enforcement Division

On December 8, 2009, BIO-key International, Inc. (the “Company”) consummated the sale (the “Asset Sale”) of its Law Enforcement division (the “Business”) to InterAct911 Mobile Systems, Inc. (“Buyer”), a wholly-owned subsidiary of InterAct911 Corporation (the “Parent”), pursuant to the Asset Purchase Agreement dated as of August 13, 2009 by and between the Company and Buyer (the “Purchase Agreement”).

Pursuant to the Purchase Agreement, Buyer acquired substantially all of the assets relating to the Business, including the Company’s customer contracts, intellectual property, accounts receivable, equipment, inventories, software, technologies, communication systems and goodwill relating to the Business. Buyer also assumed certain specified liabilities as set forth in the Purchase Agreement. The Company and InterAct Public Safety Systems, an affiliate of Buyer, have collaborated on many projects in the past, including partnership arrangements in which products used in the Business (including elements of the MobileCop®, PocketCop®, MobileRescue™, MobileOffice™, and InfoServer™ product lines) have been integrated with those of InterAct Public Safety Systems and sold to law enforcement agencies and other emergency response customers. Outside of those commercial dealings, there are no material relationships among the Company and Buyer or any of their respective affiliates other than in respect of the Purchase Agreement and the related ancillary agreements.

As consideration for the Asset Sale, Buyer paid the Company an aggregate purchase price of approximately $11.3 million. Of that amount, approximately $7.0 million was paid in cash at the closing of the Asset Sale, and approximately $300,000 was paid pursuant to the Working Capital Adjustment Schedule in the Purchase Agreement. In addition, Buyer issued a promissory note (the “Note”) in the original principal amount of $4 million in favor of the Company. The Note is to

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be paid in three equal annual installments beginning on the first anniversary of the closing and will bear interest, payable on a quarterly basis, at a rate per annum equal to six percent (6%) compounded annually on the principal sum from time to time outstanding. The Note is guaranteed by the Buyer’s Parent and its owner, SilkRoad Equity, LLC (“SilkRoad”), a private investment firm, and is secured by all of the intellectual property assets of the Business being transferred to Buyer as part of the Asset Sale. In addition, at the closing of the Asset Sale, the Company issued to SilkRoad a warrant to purchase up to 8 million shares of the Company’s common stock at a cash purchase price of $0.30 per share. This warrant will expire if not exercised prior to the fifth anniversary of the closing.

Prior to the sale, the Business had been reported as a separate segment. The Business has been reported as a discontinued operation and all periods presented have been recast accordingly to reflect these operations as discontinued.

Revenues and net income for the Law Enforcement division Segment for the years ended December 31, 2009 and 2008 were as follows:

	Year Ended December 31,
	2009		2008

Revenues	$	8,561,979	$	9,496,505
Net income (loss)	2,872,535		1,660,364

The carrying amounts of the major classes of assets and liabilities aggregated in discontinued operations in the consolidated balance sheet as of December 31, 2008 were as follows:

	December 31,
	2008

ASSETS
Accounts receivable, net of allowance for doubtful accounts of $76,553	$	624,891
Costs in Excess of Billing	144,551
Prepaid expenses	41,266
Total current assets	810,708
Equipment and leasehold improvements, net	66,561
Intangible assets—less accumulated amortization	330,889
Goodwill	7,836,986
Non-current assets	8,234,436
TOTAL ASSETS	$	9,045,144

LIABILITIES
Accounts payable	$	28,781
Accrued liabilities	638,322
Note payable	1,516,651
Deferred rent	6,541
Deferred revenue	3,006,510
Total current liabilities	5,196,805
Deferred rent	11,510
Deferred revenue	8,382
Total non-current liabilities	19,892
TOTAL LIABILITIES	$	5,216,697

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Fire Division

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 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, 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 period ended December 31, 2007, $250,000 of the escrow balance was released to ZOLL. The remaining escrow balance was remitted to the Company on 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 $15,354 was paid as related professional fees to settle the claim, resulting in a loss on disposal of the Fire Segment of $65,354 during 2008.

Prior to the sale, Fire had been reported as a separate segment. The Fire Segment has been reported as a discontinued operation 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 years ended December 31, 2009 and 2008 were as follows:

	Year Ended December 31,
	2009		2008

Revenues	$	—	$	—
Net loss	—		(65,354		)

NOTE C—ACQUISITIONS

Acquisition of Mobile Government

On September 30, 2004, we acquired certain assets and assumed certain liabilities of the Mobile Government division of Aether Systems, Inc (Aether). The aggregate purchase price of the acquisition was $12,198,171.

In conjunction with the acquisition of the Mobile Government division, the Company was required to place funds into escrow, which were made fully available for use by the company on termination of the lease in August 2008.

NOTE D—CONCENTRATION OF RISK

Financial instruments and long-term contracts, which potentially subject the Company to risk, primarily consist of receivables and costs and earnings in excess of billings on uncompleted contracts. The Company extends credit to customers on an unsecured basis in the normal course of business. The Company’s policy is to perform an analysis of the recoverability of its receivables and costs and earnings in excess of billings on uncompleted contracts at the end of each reporting period and to establish allowances where appropriate. The Company analyzes historical bad debts and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances.

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, as follows:

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	Years Ended December 31,
	2009		2008

Customer A	—		56	%
Customer B	28	%	*
Customer D	24	%	*

* Less than 10% of total revenue

The Company had concentrations of customers in certain industry groups which represented 10% or more of the Company’s total revenue, as follows:

	Years Ended December 31,
	2009		2008

Government	0	%	0	%
Commercial	100	%	100	%

The Company had certain customers whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:

	As of December 31,
	2009		2008

Customer B	59	%	*
Customer C	16	%	—
Customer D	*		21	%
Customer E	—		51	%

* Less than 10% of total accounts receivable

NOTE E—NOTE RECEIVABLE

Note Receivable consisted of the following as of December 31:

	2009		2008

Note Receivable — Current	$	1,334,000	$	—
Note Receivable — Non-Current	2,666,000		—

Total	$	4,000,000	$	—

As consideration for the Asset Sale (see “Note B — Discontinued Operations”), InterAct911 paid the Company an aggregate purchase price of approximately $11.3 million. Of that amount, approximately $7.0 million was paid in cash at the closing of the Asset Sale, and approximately $300,000 was paid pursuant to the Working Capital Adjustment Schedule in the Purchase Agreement. In addition, Buyer issued a promissory note (the “Note”) in the original principal amount of $4 million in favor of the Company. The Note is to be paid in three equal annual installments beginning on the first anniversary of the closing and will bear interest, payable on a quarterly basis, at a rate per annum equal to six percent (6%) compounded annually on the principal sum from time to time outstanding. The Note is guaranteed by the Parent and its owner, SilkRoad Equity, LLC (“SilkRoad”), a private investment firm, and is secured by all of the intellectual property assets of the Law Enforcement division being transferred to InterAct911 as part of the Asset Sale.

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NOTE F—PREPAID EXPENSES AND OTHER

Prepaid expenses consisted of the following as of December 31:

	2009		2008

Insurance and software licenses	$	62,330	$	53,643
Other	61,581		1,200

Total	$	123,911	$	54,843

NOTE G—EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consisted of the following as of December 31:

	2009			2008

Equipment	$	235,948		$	352,740
Furniture and fixtures	99,199			87,972
Software	28,624			72,575
Leasehold improvements	39,975			24,382
	403,746			537,669

Less accumulated depreciation and amortization	(364,503		)	(511,992		)

Total	$	39,243		$	25,677

NOTE H—OTHER ASSETS

Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008, were as follows:

	Law Segment			Total

Balance as of January 1, 2008	$	7,836,986		$	7,836,986
Additions/subtractions	—			—

Balance as of December 31, 2008	$	7,836,986		$	7,836,986
Goodwill included in gain on disposal of reporting unit	(7,836,986		)	(7,836,986		)

Balance as of December 31, 2009	$	—		$	—

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Intangible Assets

Intangible assets consisted of the following as of December 31:

	2009							2008
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Patents and patents pending	$	287,248	$	(56,989	)	$	230,259	$	297,101	$	(45,289	)	$	251,812

Total	$	287,248	$	(56,989	)	$	230,259	$	297,101	$	(45,289	)	$	251,812

Aggregate amortization expense for the year ended December 31, 2009 and 2008, was $11,876 and $12,123, respectively.

Deposits

Deposits consisted of the following as of December 31:

	2009		2008

Property and security deposits	$	8,712	$	7,812

Total	$	8,712	$	7,812

Lease and property deposits are held over the Company’s premises as security for contractual performance under certain operating leases. At the conclusion of these lease arrangements, which is expected to occur over a number of dates through August 2014, the lease and property deposits shall be returned to the Company.

Restricted cash

In 2008 the Company extended its property lease at its Marlborough, MA location. Pursuant to the agreement BIO-key was to maintain a security deposit in the form of an irrevocable letter of credit in the amount of $40,500. However, BIO-key and the landlord for the property subsequently agreed to have BIO-key place the funds in a third party escrow account, to be returned at the conclusion of the lease term, in August 2011. Pursuant to the sale of the Company’s Law Enforcement to InterAct911 in December 2009 (see “Note B — Discontinued Operations”), the Company is no longer situated at this location, and expects to fully assign the obligations of the Marlborough premises in early 2010. Accordingly, the balance is recorded as the current asset, “Restricted cash” as at December 31, 2009.

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NOTE I—ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of December 31:

	2009		2008

Contract costs not yet invoiced by vendors	$	—	$	105,788
Compensation	92,860		48,030
Compensated absences	143,387		130,433
Royalties	—		33,402
Interest	—		176,083
Dividends payable	128,644		3,435
Tax payable	188,000		—
Other	155,874		166,396

Total	$	708,765	$	663,567

NOTE J—RELATED PARTY

Consulting Arrangement with Thomas J. Colatosti

Mr. Colatosti has substantial experience in the biometric industry and in addition to his role as the Chairman of the Board of Directors of the Company, provides extensive service to the Company in the areas of strategic planning and corporate finance. During the year ended December 31, 2009, the Company paid Mr. Colatosti approximately $150,000.

On December 28, 2009 the Company issued Thomas Colatosti 7% convertible promissory notes with a principal balance of $64,878 (see “Note L - Notes Payable, Convertible Debt Financing / Warrants”).

NOTE K—DEFERRED REVENUE

The components of Deferred Revenue are as follows as of December 31:

	2009		2008

Current Portion
Maintenance contracts	$	177,880	$	501,353
Fully deferred systems, installation and acceptance revenue	23,116		176,613
	200,996		677,966
Long-Term Portion
Maintenance contracts	9,391		—

Total	$	210,387	$	677,966

Maintenance contracts include provisions for unspecified when-and-if available product updates and customer telephone support services, and are recognized ratably over the term of the service period. Fully deferred systems, installation and acceptance revenue relates to projects that have been billed per the contractual terms, however because of undelivered elements or acceptance criteria, revenue has not yet been recognized. These amounts are expected to be completed within the

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next 12 months and are classified as current liabilities.

Long-term maintenance contracts are recognized ratably over the applicable term. The term for these contracts begin upon the completion and acceptance of the long-term projects, which can be delayed based on various criteria ranging from customer constraints to project change orders. Because of the uncertainty of the timing of acceptance on these long-term projects this deferred revenue has been classified as a long-term liability.

NOTE L—NOTES PAYABLE, CONVERTIBLE DEBT FINANCING / WARRANTS

Notes Payable

Effective as of July 2, 2009, the Company entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with Longview Special Finance, Inc. and Longview Fund, L.P. (collectively, the “Longview Entities”) in order to resolve all matters relating to the litigation initiated by the Longview Entities earlier this year, in which they were seeking $2,886,563 in damages and an unspecified amount of interest and attorney’s fees from the Company as a result of the Company’s alleged improper failure to redeem their outstanding shares of the Company’s Convertible Preferred Stock (collectively, the “Shares”) in accordance with the terms and conditions of such preferred stock. Pursuant to the Settlement Agreement, without admission of any liability or fault, the parties agreed to a payment schedule under which the Company was required to pay a total cash settlement amount of $2,164,922, fifty percent (50%) of which was paid on July 7, 2009. The remaining portion of the settlement amount accrued interest at seventeen percent (17%) per annum and was required to be paid in full on or before October 30, 2009. In return, the Longview Entities agreed to a full and complete release of the Company from all claims that were or could have been alleged in the lawsuit and agreed to relinquish all of the Shares upon receiving final payment of the settlement amount. From October 30, 2009 until November 12, 2009, interest on the remaining portion of the settlement amount accrued at twenty percent (20%) per annum. On November 12, 2009, the Company paid in full the entire outstanding portion of the settlement amount, together with all accrued and unpaid interest, and satisfied all of its obligations to the Longview Entities under the Settlement Agreement.

On July 7, 2009, the Company issued an unsecured promissory note (the “Note”) in the aggregate principal amount of $1,000,000 to the Shaar Fund, Ltd (“Shaar”). The Note accrued interest at eight percent (8%) per annum and was originally due and payable on November 4, 2009. Pursuant to a Note Amendment and Extension Agreement dated as of November 3, 2009 between the Company and Shaar, Shaar extended the due date of the Note to the earlier to occur of (i) the fifth business day after the closing of the Asset Sale (see “Note B — Discountinued Operations”), and (ii) January 31, 2010. On November 12, 2009, the Company issued a an unsecured bridge note (the “Bridge Note”) in the aggregate principal amount of $750,000 to Shaar. The Bridge Note accrued interest at six percent (6%) per annum and was due and payable on December 15, 2009. Both the Note and the Bridge Note were paid in full in accordance with their terms.

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Convertible Debt Financing/Warrants

Convertible debt financing and warrants consisted of the following as of December 31:

	2009			2008

Current Portion
2005
FMV of warrants	$	47,773		$	—
2009
Convertible promissory notes	737,957			—
Discount	(659,138		)	—
FMV of embedded derivatives	344,891			—
Total	$	471,483		$	—

Long-Term Portion
2004
FMV of warrants	$	—		$	291
2005
FMV of warrants	—			6,666
2006
FMV of warrants	63,901			5,360
Total	$	63,901		$	12,317

Convertible Promissory Notes

On November 12, 2009, the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”), pursuant to which the Company and the holders of the outstanding shares of the Company’s Series A Convertible Preferred Stock, agreed to exchange (a) their shares of Series A Convertible Preferred Stock for an equal number of shares of the Company’s Series D Convertible Preferred Stock, and Warrants to purchase up to an aggregate of 5,000,000 shares of the Company’s Common Stock, at an exercise price of $0.30 per share, and (b) all dividends accrued and unpaid, totaling $737,957, on their shares of Series A Convertible Preferred Stock for Seven Percent (7%) Convertible Promissory Notes (the “Convertible Notes”).

The Convertible Notes may be converted in whole or in part at any time at the option of the holder into shares of the Company’s Common Stock at a price equal to the lower of (i) the average closing price of the Common Stock as quoted by Bloomberg for the ten (10) trading days prior to the date that the notice of conversion is transmitted to the Company, and (ii) $0.30, subject to certain adjustments.

The Convertible Notes contain features that are considered embedded derivative financial instruments: Principal’s and Accrued Interest conversion option: All or a portion of the principal and all or a portion of the accrued interest of the Convertible Notes may be converted into common stock at the Holder’s option at any time at lower of i) the average 10 days trading price prior to conversion, or ii) $0.30 per share. These features have been bifurcated and recorded on the Company’s balance sheet at their fair value.

The accounting treatment of the warrants and derivatives requires that the Company record the warrants and derivatives at their relative fair value and fair value, respectively as of the inception date of the agreement. As the warrants were classified as equity instruments, no further accounting adjustment is required. With respect to the derivatives, which were classified as liabilities, in subsequent periods the derivatives are “marked-to-market” at fair value. Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.

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As of December 31, 2009, the derivatives were valued at $344,891. Conversion related derivatives were valued using the Binomial Option Pricing Model with the following assumptions: dividend yield of 0%; annual volatility of 148%; and risk free annual interest rate of 0.47% as well as probability analysis related to trading volume restrictions.

The initial fair values of the warrants and derivatives were recorded as discounts to the Convertible Notes and are being amortized to interest expense over the expected term of the debt, using the effective interest method. At December 31, 2009, the unamortized discount on the Convertible Notes was $659,138.

2004, 2005 and 2006 Warrants

The remaining 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 December 31, 2009 and 2008, using the Black Scholes Option Pricing model with the following assumptions:

	Year ended December 31,
	2009		2008
Dividend Yield	0	%	0	%
Annual volatility	107-156	%	112-121	%
Risk-free interest rate	0.20-0.47	%	0.32-0.78	%

NOTE M—SEGMENT INFORMATION

The Company has determined that its continuing operations are one discrete segment consisting of Biometric products.

Prior to the sale of the Law Enforcement division in December 2009, Law had been reported as a separate segment.

Geographically, North American sales accounted for approximately 96% and 91% of the Company’s total sales for fiscal years 2009 and 2008, respectively.

NOTE N—COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company does not own any real estate but conducts operations from four leased premises. These non-cancelable operating leases expire at various dates through 2014. In addition to base rent, the Company pays for property taxes, maintenance, insurance and other occupancy expenses according to the terms of the individual leases. The Company also leases equipment, with a non-cancelable operating lease expiring in 2010.

Future minimum rental commitments of non-cancelable operating leases are approximately as follows:

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Year s ending December 31,
2010	$	137,831
2011	135,226
2012	136,280
2013	137,370
2014	92,097
More than 5 years	—

	$	638,804

The minimum rental commitments shown in the table above do not include amounts owing under the Marlborough, MA lease, which is expected to be assigned to InterAct911 as part of the settlement of obligations under the sale of the Law Enforcement division (see “Note B — Discontinued Operations”). Monthly lease obligations currently paid by BIO-key to the landlord are reimbursed by InterAct911.

Rental expense was approximately $138,000 and $144,000 during 2009 and 2008, respectively.

Employment Agreements

The Company has three employment agreements. These agreements allow the continuation of the employee’s salary in the event of termination without cause. The agreements also acknowledge the employee’s eligibility to participate in the Company’s bonus and option plans, the terms of which have not yet been established. As of December 31, 2009, the aggregate commitment under these agreements was approximately $190,000.

Legal Proceedings

In the normal course of business, the Company periodically becomes involved in litigation. As of December 31, 2009, in the opinion of management, the Company had no pending litigation that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Effective as of July 2, 2009, the Company entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with Longview Special Finance, Inc. and Longview Fund, L.P. (collectively, the “Longview Entities”) in order to resolve all matters relating to the litigation initiated by the Longview Entities earlier this year, in which they were seeking $2,886,563 in damages and an unspecified amount of interest and attorney’s fees from the Company as a result of the Company’s alleged improper failure to redeem their outstanding shares of the Company’s Convertible Preferred Stock (collectively, the “Shares”) in accordance with the terms and conditions of such preferred stock. Pursuant to the Settlement Agreement, without admission of any liability or fault, the parties agreed to a payment schedule under which the Company was required to pay a total cash settlement amount of $2,164,922, fifty percent (50%) of which was paid on July 7, 2009. The remaining portion of the settlement amount accrued interest at seventeen percent (17%) per annum and was required to be paid in full on or before October 30, 2009. In return, the Longview Entities agreed to a full and complete release of the Company from all claims that were or could have been alleged in the lawsuit and agreed to relinquish all of the Shares upon receiving final payment of the settlement amount. From October 30, 2009 until November 12, 2009, interest on the remaining portion of the settlement amount accrued at twenty percent (20%) per annum. On November 12, 2009, the Company paid in full the entire outstanding portion of the settlement amount, together with all accrued and unpaid interest, and satisfied all of its obligations to the Longview Entities under the Settlement Agreement.

Accrued Royalties

From time to time, the Company licenses or sells products which may include technology obtained from third parties under a royalty agreement. These agreements obligate the company to pay the third party a fixed fee, or in some instances, a percentage of the associated revenue. The fees are generally due and payable only when software has been installed and accepted by the customer. For the years ended December 31, 2009 and 2008, royalty expense was approximately $82,770 and $53,483, respectively.

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Warranty Reserve

In some instances the Company may make commitments to provide additional products or services to customers beyond those obligations specified in the contract or those provided in standard maintenance agreements or ordinary upgrades. These commitments usually arise in complex customer installations and are granted to help ensure customer satisfaction. As of December 31, 2009, there was no material requirement for an accrued warranty liability reserve.

NOTE O— EQUITY

1. Mezzanine Equity

Redeemable 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.

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 the 2006 Convertible Notes. Each share of Series B Preferred Stock had an Original Issue Price of $1.00 per share. The holder had 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 Stock. The conversion price was subject to adjustment if common stock was 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.

The mandatory redemption features of the Series B Convertible Preferred Stock were triggered in January 2009 due to the passing of the applicable mandatory redemption dates and the price of the Company’s common stock, as reported by the OTC Bulletin Board, trading below the applicable thresholds contained in the terms of the Preferred Stock. Absent a waiver from the holders of the Preferred Stock, the Company was therefore required to redeem its outstanding shares of Preferred Stock, to the extent that the Company was legally permitted to do so, by paying cash to the holders of such shares in accordance with the terms of such Preferred Stock. From January 2009, the Company accrued dividends at the default rate of 17%.

Effective as of July 2, 2009, the Company entered into an Agreement and redeemed 520,612 shares of Series B Preferred Stock for a total cash settlement amount of $390,459, fifty percent (50%) of which was paid on July 7, 2009. The remaining portion of the settlement amount accrued interest at seventeen percent (17%) per annum until October 30, 2009, and twenty percent (20%) per annum from October 30, 2009 until November 12, 2009, when the Company paid in full the entire outstanding portion of the settlement amount, together with all accrued and unpaid interest, and satisfied all of its obligations to the Longview Entities under the Settlement Agreement.

Following the consummation of the sale of the Company’s Law Enforcement division to InterAct on December 8, 2009, the Company redeemed all of the remaining Series B Preferred Stock for a total cash settlement amount of $450,000. Also, in conjunction with the redemption of the Series B Preferred Stock, all accumulated and unpaid dividends on the Series B Preferred Stock were converted into common shares, except for $14,450, which has been recognized as dividends payable as at December 31, 2009.

As of December 31, 2009 and 2008, 1,000,000 Series B Preferred Stock shares were authorized, 0 and 970,612 of which were issued and outstanding, respectively, at a par value of $0.0001.

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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 2004 and 2005 Subordinated Notes. Each share of Series C Preferred Stock had an Original Issue Price of $10.00 per share. The holder had 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 was subject to adjustment if common stock was 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.

The mandatory redemption features of the Series C Convertible Preferred Stock were triggered in January 2009 due to the passing of the applicable mandatory redemption dates and the price of the Company’s common stock, as reported by the OTC Bulletin Board, trading below the applicable thresholds contained in the terms of the Preferred Stock. Absent a waiver from the holders of the Preferred Stock, the Company was therefore required to redeem its outstanding shares of Preferred Stock, to the extent that the Company was legally permitted to do so, by paying cash to the holders of such shares in accordance with the terms of such Preferred Stock. From January 2009, the Company accrued dividends at the default rate of 17%.

Effective as of July 2, 2009, the Company entered into an Agreement and redeemed 236,595 shares of Series C Preferred Stock for a total cash settlement amount of $1,774,463, fifty percent (50%) of which was paid on July 7, 2009. The remaining portion of the settlement amount accrued interest at seventeen percent (17%) per annum until October 30, 2009, and twenty percent (20%) per annum from October 30, 2009 until November 12, 2009, when the Company paid in full the entire outstanding portion of the settlement amount, together with all accrued and unpaid interest, and satisfied all of its obligations to the Longview Entities under the Settlement Agreement.

Following the consummation of the sale of the Company’s Law Enforcement division to InterAct on December 8, 2009, the Company redeemed all of the remaining Series C Preferred Stock for a total cash settlement amount of $3,554,370. Also, in conjunction with the redemption of the Series C Preferred Stock, all accumulated and unpaid dividends on the Series C Preferred Stock were converted into common shares, except for $110,759, which has been recognized as dividends payable as at December 31, 2009.

As of December 31, 2009 and 2008, 600,000 Series C Preferred Stock shares were authorized, 0 and 592,032 of which were issued and outstanding, respectively, at a par value of $0.0001.

Series D Convertible Preferred Stock

The Company issued 30,557 shares of redeemable Series D Convertible Preferred Stock on December 28, 2009, in exchange for 30,557 shares of Series A Convertible Preferred Stock. Each share of Series D Preferred Stock has an Original Issue Price of $100.00 per share. The holder has the option to redeem the shares of Series D 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 D 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 D shares shall occur on December 31, 2010 by the Company paying cash equal to $100.00 per share with all accrued and unpaid dividends. In any liquidation of the Company, each share of preferred stock is entitled to a liquidation preference before any distribution may be made on the Company’s common stock.

As of December 31, 2009, 100,000 Series D Preferred Stock shares were authorized, 30,557 of which were issued and outstanding, at a par value of $0.0001 and a liquidation preference of $100.00 with accumulated dividends in arrears of $1,782, which have been accreted to the principal balance of the Series D Preferred Stock.

The Series D 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; Semi Annual Dividends Conversion Option: Holders have the option to convert the Stock’s semi-annual dividend payment at any time at the fixed conversion price of $0.30 per share. These features have been bifurcated and

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recorded on the Company’s balance sheet as liabilities, at their fair value.

As of December 31, 2009, the derivatives were valued at $563,599.

An amount equal to the original value of the derivatives was recorded as a discount to the Series D 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 term of the Preferred Stock. At December 31, 2009, the unamortized discount on the Preferred Stock was $426,889.

2. Permanent Equity

Common Stock

The Company is authorized to issue 170,000,000 shares of common stock, $.0001 par value per share, of which 77,713,398 and 67,876,880 were outstanding as of December 31, 2009 and 2008, respectively.

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.

During the year ended December 31, 2009, preferred stockholders converted accumulated dividends of $1,385,752 into 9,836,518 shares of the Company’s common stock. During the year ended December 31, 2008, preferred stockholders converted accumulated dividends of $826,739 into 6,723,678 shares of the Company’s common stock.

Series A Convertible Preferred Stock

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 0 and 30,557 were issued and outstanding as at December 31, 2009 and 2008, respectively.

The mandatory redemption features of the Series A Convertible Preferred Stock were triggered in January 2009 due to the passing of the applicable mandatory redemption dates and the price of the Company’s common stock, as reported by the OTC Bulletin Board, trading below the applicable thresholds contained in the terms of the Preferred Stock. Absent a waiver from the holders of the Preferred Stock, the Company was therefore required to redeem its outstanding shares of Preferred Stock, to the extent that the Company was legally permitted to do so, by paying cash to the holders of such shares in accordance with the terms of such Preferred Stock. From January 2009, the Company accrued dividends at the default rate of 9%.

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3. Warrants

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

	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 December 31, 2008	10,566,375		$	0.95

Granted	13,000,000		0.30
Exercised	—		—
Expired	(6,790,584	)	1.23
Outstanding, as of December 31, 2009	16,775,791		$	0.33	4.09	$	—
Vested or expected to vest at December 31, 2009	16,775,791		$	0.33	4.09	—
Exercisable at December 31, 2009	16,775,791		$	0.33	4.09	—

The warrants outstanding and exercisable at December 31, 2009 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	15,798,014	4.28
	0.75	533,333	1.61
	1.00	444,444	0.44
		16,775,791

NOTE P—STOCK-BASED COMPENSATION

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 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 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

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granted may not exceed ten years. Options issued under the 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 expired 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 this 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 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 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

Information summarizing option activity is as follows:

													Weighted
											Weighted		average
											average		remaining	Aggregate
	Number of Options										exercise		life	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	—		—		(27,336	)	—		(27,336	)	0.63
Expired	—		(470,000	)	(115,410	)	(188,000	)	(773,410	)	0.84
Outstanding, as of December 31, 2008	80,000		335,000		2,837,941		3,755,000		7,007,941		$	0.78

Granted	—		500,000		1,189,417		1,329,841		3,019,258		0.24
Exercised	—		—		—		—		—		—
Forfeited	(35,000	)	(135,000	)	(1,510,677	)	(3,455,000	)	(5,135,677	)	0.89
Expired	—		(200,000	)	(443,492	)	(300,000	)	(943,492	)	0.73
Outstanding, as of December 31, 2009	45,000		500,000		2,073,189		1,329,841		3,948,030		0.24		4.33	$	234,532
Vested or expected to vest at December 31, 2009									3,856,790		0.24		4.30	$	221,363
Exercisable at December 31, 2009									3,426,861		0.26		4.14	$	160,190

The options outstanding and exercisable at December 31, 2009 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
$	0.07-0.21	1,596,272	$	0.11	5.63	1,075,103	$	0.11
	0.22-0.40	2,229,258	0.30		3.57	2,229,258	0.30
	0.41-0.68	47,500	0.48		0.68	47,500	0.48
	0.69-0.94	75,000	0.94		1.84	75,000	0.94
$	0.07-0.94	3,948,030				3,426,861

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The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Company’s closing stock price of $0.24 as of December 31, 2009, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of December 31, 2009 was 1,075,103.

The weighted average fair value of options granted during the years ended December 31, 2009 and 2008 was approximately $0.10 per share. The total intrinsic value of options exercised during the years ended December 31, 2009 and 2008 was $0. The total fair value of shares vested during the years ended December 31, 2009 and 2008 was $327,382 and $521,831 respectively.

As of December 31, 2009 future compensation cost related to nonvested stock options is approximately $24,730 and will be recognized over an estimated weighted average period of approximately 0.9 years.

On November 2, 2009, in preparation for the sale of the Law Enforcement Division, the Company:

(i) cancelled all outstanding options to acquire shares of the Company’s common stock, $0.0001 par value per share (“Common Stock”), held by officers, directors and employees of the Company and having an exercise price greater than $0.30 per share granted under the Company’s 2004 Stock Incentive Plan and granted the holders of such options new options to acquire shares of Common Stock with an exercise price equal to $0.30 per share and covering a proportionately reduced number of shares of Common Stock relative to the existing exercise price, and

(ii) offerred to the holders of all outstanding options to acquire shares of Common Stock having an exercise price greater than $0.30 granted under the Company’s 1999 Stock Option Plan, the Company’s 1996 Stock Option Plan, or under stock option agreements not subject to any of the Company’s equity incentive plans, the opportunity to cancel such options and receive in exchange therefor new options to acquire shares of Common Stock under the respective plan or under stock option agreements not subject to any of the Company’s equity incentive plans, in each case with an exercise price equal to $0.30 per share and covering a proportionately reduced number of shares of Common Stock relative to the existing exercise price.

All of the outstanding options to acquire shares of Common Stock having an exercise price greater than $0.30 per share were fully vested as of November 2, 2009 and all new options granted to the holders of those options were fully vested as of the date of grant. The options granted to any employee of the Company whose employment with the Company terminated in connection with the sale of the Company’s Law Enforcement Division and who became an employee of the buyer upon such closing shall be exercisable for up to eighteen (18) months from and after the date of grant. The remaining options shall be exercisable for up to three (3) years from and after the date of grant.

The Company recorded compensation expense during the 2009 period of approximately $138,000 for the modification of the above awards, of which approximately $84,000 related to the Company’s continuing operations, and approximately $54,000 related to the Company’s discontinued Law Enforcement division.

NOTE Q— GAIN ON REDEMPTION OF REDEEMABLE PREFERRED STOCK

Pursuant to the Settlement Agreement entered into between the Company and the Longview Entities in July 2009, the Company paid a total cash settlement amount of $2,164,922 to the Longview Entities for the redemption of the outstanding shares of the Company’s Convertible Preferred Stock held by the Longview Entities, and accumulated and unpaid dividends therein. The settlement amount represented a discount to the value of the Shares and accumulated and unpaid dividends, resulting in a gain to the Company of $721,640. The Company increased Additional Paid in Capital by the amount of this gain.

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NOTE R—INCOME TAXES

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.

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 2006-2009 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 significant interest expense recognized during the years ended December 31, 2009 and 2008.

The Company has deferred taxes due to income tax credits, net operating loss carryforwards, and the effect of temporary differences between the carrying values of certain assets and liabilities for financial reporting and income tax purposes. Significant components of deferred taxes are as follows at December 31:

	2009			2008

Current asset:
Accrued compensation	$	79,000		$	172,000
Accounts receivable allowance	5,000			32,000
Non-current asset:
Basis differences in fixed assets	29,000			68,000
Basis differences in intangible assets	22,000			573,000
Accrued interest and other	—			79,000
Income tax credits	1,939,000			1,680,000
Net operating loss carryforwards	12,643,000			15,350,000
Valuation allowances	(14,717,000		)	(17,954,000		)

	$	—		$	—

For year ended December 31, 2009, $188,000 has been accrued for state and federal tax liabilities for the AMT tax calculated and netted against the gain on the Law Enforcement Division sale.

As of December 31, 2009 the Company has federal and state net operating loss carryforwards of approximately $35,476,000 and $12,020,000, respectively, subject to expiration between 2010 and 2028.

These net operating loss carryforwards are subject to the limitations under Section 382 of the Internal Revenue Code due to changes in the equity ownership of the Company.

A valuation allowance equal to the full amount of the deferred tax assets has been recorded due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income. Similarly, income tax benefits related to stock options exercised have not been recognized in the financial statements.

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A reconciliation of the effective income tax rate on operations reflected in the Statements of Operations to the US Federal statutory income tax rate is presented below.

	2009		2008

US Federal statutory income tax rate	34	%	34	%
State taxes, net	0		0
Permanent differences	24		229
Temporary differences	(4	)	(46	)
Change in valuation allowance	(54	)	(217	)

Effective tax rate	0	%	0	%

NOTE S—FAIR VALUES OF FINANCIAL INSTRUMENTS

The Company’s derivative financial instruments as at December 31, 2009 and 2008 consisted of embedded derivatives related to the Convertible Notes Payable as well as the Series B, Series C and Series D Convertible Preferred Stock. These embedded derivatives include certain conversion features on debt principal and accrued interest therein, and also preferred principal and accumulated and unpaid dividends therein. The Company also issued warrants to purchase shares of the Company’s Common stock as part of various debt and preferred equity financings.

The accounting treatment of the warrants and derivatives requires that the Company record the warrants and derivatives at their relative fair value or fair value, depending on whether the instrument is initially classified as a liability or equity. As the warrants issued during 2009 were classified as equity instruments, no further accounting adjustment is required. With respect to the derivatives, and warrants issued prior to the 2009, which were classified as liabilities, in subsequent periods the derivatives are “marked-to-market” at fair value. Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.

Derivatives and warrants classified as liabilities consisted of the following as of December 31:

	2009		2008

Warrants	$	111,674	$	12,317
Convertible note derivatives	$	344,891	$	—
Redeemable preferred stock derivatives	$	563,599	$	439

The derivatives were valued as of December 31, 2009 and 2008, using the Binomial Option Pricing Model with the following assumptions:

	Year ended December 31,
	2009		2008
Interest or Dividend Yield	7	%	15	%
Annual volatility	74	%	42	%
Risk-free interest rate	0.47	%	0.92	%

The assumptions relating to the valuation of the warrants are listed in Note L.

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NOTE T—SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION

	Years ended December 31,
	2009		2008

Cash paid for:
Interest	$	78,681	$	66,626
Noncash Financing Activities:
Issuance of debt in exchange of discounted Series B redeemable preferred stock	390,459		—
Gain on redemption of Series B redeemable preferred stock	130,153		—
Issuance of debt in exchange of discounted Series C redeemable preferred stock	1,774,463		—
Gain on redemption of Series C redeemable preferred stock	591,487		—
Issuance of Series D redeemable preferred stock in exchange for Series A preferred stock	3,055,700		—
Issuance of debt in exchange for cumulative dividends on Series A preferred Stock	737,957		—
Issuance of common stock in exchange for Series A, Series B, and Series C preferred stock and cumulative dividends in arrears, thereon	1,385,752		826,739
Origination of warrants in conjunction with convertible note financing	373,956		—
Origination of warrants in conjunction with sale of law enforcement division	1,461,044		—
Origination of embedded derivatives with preferred stock	430,398		—
Origination of note receivable in exchange for proceeds on the sale of the law enforcement division	4,000,000		—

NOTE U—PROFIT SHARING PLAN

The Company has established a savings plan under section 401(k) of the Internal Revenue Code. All employees of the Company, after completing one day of service are eligible to enroll in the 401(k) plan. Participating employees may elect to defer a portion of their salary on a pre-tax basis up to the limits as provided by the IRS Code. The Company is not required to match employee contributions but may do so at its discretion. The Company made no contributions during the two years ended December 31, 2009.

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NOTE V—EARNINGS PER SHARE “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 years ended December 31, 2009 and 2008, diluted per share computations are not presented since this effect would be antidilutive.

The reconciliation of the numerator of the basic and diluted EPS calculations, due to the inclusion of preferred stock dividends, accretion, and gain on redemption, was as follows for the following fiscal years ended December 31:

	2009			2008
Numerator:

Loss from continuing operations	$	(2,662,888	)	$	(1,475,831	)
Convertible preferred stock dividends, accretion, and gain on redemption	(518,749		)	(1,890,503		)
Loss applicable to common stockholders (basic and diluted EPS)	$	(3,181,637	)	$	(3,366,334	)

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 anti-dilutive.

	Years ended December 31,
	2009	2008

Preferred Stock	31,708,030	33,155,440
Convertible Debt	20,218	—
Stock Options	421,081	35,747

Potentially dilutive shares	32,149,329	33,191,187

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

	Years ended December 31,
	2009	2008

Stock options	2,613,758	6,480,669
Warrants	16,775,791	10,566,375

Total	19,389,549	17,047,044

NOTE W—RECLASSIFICATIONS

Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 presentation. These reclassifications had no effect on the previously reported net loss or stockholders’ equity (deficit).

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NOTE Y—Results by Quarter (Unaudited)

The following table presents selected unaudited financial information for the eight quarters in the period ended December 31, 2009. The results for any quarter are not necessarily indicative of future quarterly results and, accordingly, period-to-period comparisons should not be relied upon as an indication of future performance.

	For the Quarters Ended
	March 31, 2008			June 30, 2008			September 30, 2008			December 31, 2008			March 31, 2009			June 30, 2009			September 30, 2009			December 31, 2009

Revenue	$	352,619		$	1,221,276		$	452,928		$	1,352,719		$	538,194		$	280,685		$	524,351		$	1,014,052
Gross profit	303,317			1,177,485			354,637			1,205,945			401,115			212,254			329,565			910,113
Income (loss) from continuing operations	(937,855		)	(42,487		)	(629,976		)	134,487			(789,813		)	(890,407		)	(794,172		)	(188,496		)
Income (loss) from discontinued operations	22,186			276,098			585,008			777,072			1,011,862			1,030,177			724,761			105,735
Gain (loss) on disposal of discontinued operations	—			(65,354		)	—			—			—			—			—			4,483,902
Net income (loss)	$	(915,669	)	$	168,257		$	(44,968	)	$	911,559		$	222,049		$	139,770		$	(69,411	)	$	4,401,141
Basic and diluted earnings per common share:
Loss from continuing operations	$	(0.02	)	$	(0.01	)	$	(0.02	)	$	(0.00	)	$	(0.02	)	$	(0.02	)	$	(0.01	)	$	(0.00	)
Income (loss) from discontinued operations	0.00			0.00			0.01			0.01			0.02			0.02			0.01			0.00
Gain on disposal of discontinued operations	—			(0.00		)	—			—			—			—			—			0.06
Net loss	$	(0.02	)	$	0.00		$	(0.01	)	$	0.01		$	0.00		$	0.00		$	(0.00	)	$	0.06

Weighted average shares outstanding:
Basic and diluted	61,786,732			63,180,281			64,913,843			66,720,602			68,477,547			71,291,168			73,521,550			76,821,746

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BIO-KEY INTERNATIONAL, INC.

Date: March 26, 2010	By:	/s/ MICHAEL W. DEPASQUALE
		Michael W. DePasquale
		CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.

Signature	Title	Date

/s/ MICHAEL W. DEPASQUALE	Chief Executive Officer and Director	March 26, 2010
Michael W. DePasquale

/s/ CECILIA WELCH	Chief Financial Officer, Principal Accounting Officer	March 26, 2010
Cecilia Welch

/s/ THOMAS J. COLATOSTI	Chairman of the Board of Directors	March 26, 2010
Thomas J. Colatosti

/s/ JEFFREY J. MAY	Director	March 26, 2010
Jeffrey J. May

/s/ CHARLES P. ROMEO	Director	March 26, 2010
Charles P. Romeo

/s/ JOHN SCHOENHERR	Director	March 26, 2010
John Schoenherr

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EXHIBIT INDEX

Exhibit No.		Description
3.1(3)		Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation
3.2(3)		Certificate of Designation of Series A 7% Convertible Preferred Stock of BIO-key International, Inc., a Delaware corporation
3.3(3)		By-Laws of BIO-key International, Inc., a Delaware corporation
3.4 (19)		Certificate of Amendment of Certificate of Incorporation of BIO-key International, Inc., a Delaware corporation
3.5 (16)		Certificate of Designation of the Series B Convertible Preferred Stock of the Company
3.6 (21)		Certificate of Designation of the Series C Convertible Preferred Stock of the Company
3.7 (8)		Certificate of Designation of the Series D Convertible Preferred Stock of the Company
4.1(4)		Specimen certificates for shares of BIO-key International, Inc. common stock
10.1(4)		SAC Technologies, Inc. 1996 Stock Option Plan
10.2(5)		Amendment No. 1 to the SAC Technologies, Inc. 1996 Stock Option Plan
10.3(5)		SAC Technologies, Inc. 1999 Stock Option Plan
10.4(6)		Employment Agreement by and between BIO-key International, Inc. and Mira LaCous dated November 20, 2001
10.5(9)		Option to Purchase 150,000 Shares of Common Stock issued to Thomas J. Colatosti
10.6(9)		Non-Qualified Stock Option Agreement under the registrant’s 1999 Stock Incentive Plan to Purchase 200,000 Shares of Common Stock issued to Thomas J. Colatosti
10.7(9)		Option to Purchase 580,000 Shares of Common Stock issued to Michael W. DePasquale
10.8(7)		Option to Purchase 500,000 Shares of Common Stock issued to Michael W. DePasquale
10.9(7)		Option to Purchase 150,000 Shares of Common Stock issued to Thomas J. Colatosti
10.10(7)		Option to Purchase 50,000 Shares of Common Stock issued to Thomas J. Colatosti
10.11(7)		Option to Purchase 50,000 Shares of Common Stock issued to Jeff May
10.12(11)		Securities Purchase Agreement dated as of March 31, 2004 (the “March Securities Purchase Agreement”) by and among BIO-key International, Inc. and each of the Purchasers named therein
10.13(11)		Form of Warrant issued by BIO-key International, Inc. pursuant to the March Securities Purchase Agreement
10.14(2)		Securities Purchase Agreement dated as of September 29, 2004 (the “Laurus Securities Purchase Agreement”) by and between BIO-key International, Inc., Laurus Master Fund, Ltd. and the other Purchasers party thereto
10.15(2)		Form of Common Stock Purchase Warrant issued by BIO-key International, Inc. pursuant to the Laurus Securities Purchase Agreement
10.16(2)		Registration Rights Agreement dated as of September 29, 2004 by and between BIO-key International, Inc., Laurus Master Fund, Ltd. and the other Purchasers party thereto
10.17(2)		Securities Purchase Agreement dated as of September 29, 2004 (the “Shaar Securities Purchase Agreement”) by and between BIO-key International, Inc., The Shaar Fund, Ltd. and the other Purchasers party thereto
10.18(2)		Form of Common Stock Purchase Warrant issued by BIO-key International, Inc. pursuant to the Shaar Securities Purchase Agreement
10.19(2)		Registration Rights Agreement dated as of September 29, 2004 by and between BIO-key International, Inc., The Shaar Fund, Ltd. and the other Purchasers party thereto
10.20(10)		Option to Purchase 300,000 shares of common stock issued to Kenneth Souza
10.21(10)		Employment Agreement dated as of October 4, 2004 by and between BIO-key International, Inc. and Kenneth Souza
10.22(10)		BIO-key International, Inc. 2004 Stock Incentive Plan
10.23(10)		Warrant to purchase 100,000 shares of Common Stock issued to The November Group Ltd. on July 14, 2004
10.24(10)		Warrant to purchase 230,000 shares of Common Stock issued to Jesup & Lamont Securities Corp. on March 31, 2004
10.25(10)		Warrant to purchase 105,000 shares of Common Stock issued to Douglass Bermingham on March 31, 2004
10.26(10)		Warrant to purchase 60,000 shares of Common Stock issued to Mason Sexton on March 31, 2004
10.27(10)		Warrant to purchase 22,000 shares of Common Stock issued to David Moss on March 31, 2004
10.28(10)		Warrant to purchase 22,000 shares of Common Stock issued to Patrick Gaynes on March 31, 2004
10.29(10)		Warrant to purchase 5,000 shares of Common Stock issued to Tom DuHamel on March 31, 2004
10.30(11)		Option to Purchase 155,000 shares of common stock issued to Francis J Cusick
10.31(11)		Option to Purchase 50,000 shares of common stock issued to Charles P. Romeo
10.32(12)		Securities Purchase Agreement, dated as of June 8, 2005, by and between the Company and Laurus Fund, Ltd.

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10.33(12)		Common Stock Purchase Warrant issued pursuant to the Securities Purchase Agreement, dated as of June 8, 2005, by and between the Company and the Laurus Master Fund, Ltd.
10.34(12)		Registration Rights Agreement, dated as of June 8, 2005, by and between the Company and Laurus Fund, Ltd.
10.35(12)		Securities Purchase Agreement, effective as of May 31, 2005, by and among the Company, The Shaar Fund, Ltd. and the other pursuant that are a party thereto
10.36(12)		Form of Common Stock Purchase warrant issued pursuant to the Securities Purchase Agreement, effective as of May 31, 2005, by and among the Company, The Shaar Fund, Ltd. and the other purchasers that are a party thereto
10.37(12)		Registration Rights Agreement, effective as of May 31, 2005, by and among the Company, The Shaar Fund, Ltd., Jesup & Lamont and the other purchasers that are a party thereto
10.38(20)		Escrow Agreement, dated as of May 31, 2005, by and among the Company, Jesup & Lamont Securities Corp.
		and Thelen, Reid & Priest LLP.
10.39(13)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and Laurus Master Fund, Ltd.
10.40(13)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and The Shaar Fund, Ltd.
10.41(15)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and Longview Special Finance
10.42(13)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and Etienne Des Roys
10.43(13)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and Eric Haber
10.44(13)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and Investors Management Corporation
10.45(13)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and The Tocqueville Fund
10.46(13)		Amendment and Waiver, dated as of August 31, 2005, by and between the Company and The Tocqueville Amerique Value Fund
10.47(13)		Registration Rights Agreement, dated as of August 31, 2005, by and among the Company, Laurus Master Fund, Ltd., The Shaar Fund, Ltd., Longview Special Finance, Etienne Des Roys, Eric Haber, Investors Management Corporation, The Tocqueville Fund and The Tocqueville Amerique Value Fund.
10.48(14)		Amendment and Waiver, dated as of January 23, 2006, by and between the Company and Laurus Master Fund, Ltd.
10.49(14)		Registration Rights Agreement, dated as of January 23, 2006, by and between the Company and Laurus Master Fund, Ltd.
10.50(14)		Amendment and Waiver, dated as of January 23, 2006, by and among the Company and the holders of Subordinated Convertible Promissory Notes of the Company
10.51(14)		Securities Purchase Agreement, dated as of January 23, 2006, by and among the Company, The Shaar Fund Ltd., Longview Fund, L.P. and Longview Special Finance
10.52(14)		Form of Convertible Term Note issued pursuant to the Securities Purchase Agreement, dated as of January 23, 2006, by and among the Company, The Shaar Fund Ltd., Longview Fund, L.P. and Longview Special Finance
10.53(14)		Form of Common Stock Purchase Warrant issued pursuant to the Securities Purchase Agreement, dated as of January 23, 2006, by and among the Company, The Shaar Fund Ltd., Longview Fund, L.P. and Longview Special Finance
10.54(14)		Registration Rights Agreement, dated as of January 23, 2006 by and among the Company, The Shaar Fund, Ltd., Longview Fund, L.P. and Longview Special Finance
10.55(14)		Amendment No. 1 to Subordinated Secured Promissory Note, dated as of January 23, 2006, by and between the Company and Aether Systems, Inc.
10.56(17)		Form of Option Agreement used to grant a total of 900,000 options to Purchase common stock to Francis J. Cusick, Michael W. DePasquale, Randy Fodero, and Kenneth S. Souza
10.57(18)		Amendment and Waiver, dated as of August 10, 2006, by and between the Company and Laurus Master Fund, Ltd.
10.58(18)		Registration Rights Agreement, dated as of August 10, 2006, by and between the Company and Laurus Master Fund, Ltd.
10.59(18)		Securities Exchange Agreement, dated as of August 10, 2006, by and among the Company, The Shaar Fund Ltd., Longview Fund, L.P., Longview Special Finance and certain other holders of the Company’s Subordinated Convertible Promissory Notes

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10.60(18)		Registration Rights Agreement, dated as of August 10, 2006, by and among the Company, The Shaar Fund Ltd., Longview Fund, L.P., Longview Special Finance and certain other holders of the Company’s Subordinated Convertible Promissory Notes
10.61(18)		Securities Purchase Agreement, dated as of August 10, 2006, by and between the Company and Trellus Partners, L.P.
10.62(18)		Form of Common Stock Purchase Warrant issued pursuant to the Securities Purchase Agreement, dated as of August 10, 2006, by and between the Company and Trellus Partners, L.P.
10.63(18)		Registration Rights Agreement, dated as of August 10, 2006, by and between the Company and Trellus Partners, L.P.
10.64(18)		Securities Purchase Agreement, dated as of August 10, 2006, by and between the Company and The Shaar Fund Ltd.
10.65(18)		Form of Common Stock Purchase Warrant to be issued pursuant to the Securities Purchase Agreement, dated as of August 10, 2006, by and between the Company and The Shaar Fund Ltd.
10.66(18)		Registration Rights Agreement, dated as of August 10, 2006, by and between the Company and The Shaar Fund Ltd.
10.67 (19)		Amendment and Waiver, dated as of December 29, 2006, by and between the Company and Laurus Master Fund, Ltd.
10.68 (20)		Amendment and Waiver, dated as of April 18, 2007, by and between the Company and Laurus Master Fund, Ltd.
10.69 (21)		Purchase and Sale Agreement, dated as of May 22, 2007, by and between the Company and ZOLL Data Systems, Inc
10.70 (27)		Options to Purchase 50,000 and 65,241 Shares of Common Stock issued to Thomas J. Colatosti
10.71 (27)		Options to Purchase 100,000 and 130,481 Shares of Common Stock issued to Jeff May
10.72 (27)		Options to Purchase 50,000 and 32,620 Shares of Common Stock issued to Charles Romeo
10.73 (27)		Options to Purchase 50,000 and 48,930 Shares of Common Stock issued to John Schoenherr
10.74 (24)		Settlement and Mutual Release Agreement, dated July 28, 2008, by and between the Company and Dataradio Corporation.
10.75 (27)		Option to Purchase 500,000 Shares of Common Stock issued to Michael W. DePasquale
10.76 (27)		Option to Purchase 50,000 Shares of Common Stock issued to Thomas J. Colatosti
10.77 (27)		Options to Purchase 50,000 and 25,000 Shares of Common Stock issued to Jeff May
10.78 (27)		Option to Purchase 50,000 Shares of Common Stock issued to Charles Romeo
10.79 (27)		Option to Purchase 100,000 Shares of Common Stock issued to John Schoenherr

10.80 (28)		Amendment Agreement, dated April 1, 2009, by and between the Company and Dataradio Corporation
10.81 (29)		Settlement and Mutual Release Agreement, dated July 2, 2009, by and between the Company and Longview Special Finance, Inc., and Longview Fund LP
10.82 (29)		Promissory Note, dated July 7, 2009, by and between the Company and The Shaar Fund Ltd
10.83 (8)		Asset Purchase Agreement, dated August 13, 2009, by and between the Company and Interact911 Mobile Systems, Inc.
10.84 (8)		Note Amendment and Extension Agreement, dated as of November 3, 2009, by and between the Company and The Shaar Fund Ltd
10.85 (8)		Securities Exchange Agreement, dated as of November 12, 2009, by and between the Company and The Shaar Fund Ltd., and Thomas J. Colatosti
10.86 (8)		Promissory Note, dated December 7, 2009, by and between the Company and InterAct911 Mobile Systems, Inc.
10.87 (8)		Warrant to purchase 8,000,000 shares of Common Stock issue to Silkroad Equity, LLC on December 7, 2009
10.88 (8)		Warrant to purchase 4,750,000 shares of Common Stock issued to The Shaar Fund Ltd. on December 28, 2009
10.89 (8)		Warrant to purchase 250,000 shares of Common Stock issued to Thomas J. Colatosti on December 28, 2009
10.90 (8)		Convertible Note, dated as of December 28, 2009, by and between the Company and The Shaar Fund Ltd.
10.91 (8)		Convertible Note, dated as of December 28, 2009, by and between the Company and Thomas J. Colatosti
10.92 (8)		Compensation Agreement, dated January 12, 2010, by and between the Company and Mr. Colatosti
10.93 (8)		Employment Agreement, effective March 25, 2010, by and between the Company and Michael W. DePasquale
21.1 (26)		List of subsidiaries of BIO-key International, Inc.
23.1 (8)		Consent of CCR LLP
31.1 (8)		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 (8)		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 (8)		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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32.2 (8)

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on April 14, 2004 and incorporated herein by reference.

(2) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2004 and incorporated herein by reference.

(3) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on January 5, 2005 and incorporated herein by reference.

(4) Filed as an exhibit to the registrant’s registration statement on Form SB-2, File No. 333-16451 dated February 14, 1997 and incorporated herein by reference.

(5) Filed as an exhibit to the registrant’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2000 and incorporated herein by reference.

(6) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2001 and incorporated herein by reference.

(7) Filed as an exhibit to the registrant’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on March 26, 2004 and incorporated herein by reference.

(8) Filed herewith.

(9) Filed as an exhibit to the registrant’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2003 and incorporated herein by reference.

(10) Filed as an exhibit to the registrant’s registration statement on Form SB-2, File No. 333-120104 dated October 29, 2004 and incorporated herein by reference.

(11) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on March 4, 2005 and incorporated herein by reference.

(12) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on June 14, 2005 and incorporated herein by reference.\

(13) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on September 7, 2005 and incorporated herein by reference.

(14) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2006 and incorporated herein by reference.

(15) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on February 9, 2006 and incorporated herein by reference.

(16) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on March 29, 2006 and incorporated herein by reference.

(17) Filed as an exhibit to the registrant’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on March 29, 2006 and incorporated herein by reference.

(18) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2006 and incorporated herein by reference.

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(19) Filed as an exhibit to the registrant’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2007 and incorporated herein by reference.

(20) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2007 and incorporated herein by reference.

(21) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on May 25, 2007 and incorporated herein by reference.

(22) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on July 18, 2007 and incorporated herein by reference.

(23) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2008 and incorporated herein by reference.

(24) Filed as an exhibit to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2008 and incorporated herein by reference.

(25) Filed as an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2008 and incorporated herein by reference.

(26) Previously filed

(27) Filed as an exhibit to the registrant’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2009 and incorporated herein by reference.

(28) Filed as an exhibit to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 8, 2009 and incorporated herein by reference.

(29) Filed as an exhibit to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 2009 and incorporated herein by reference.

Exhibit 3.7

Certificate of Designation

of the Preferred Stock of

BlO-key International, Inc.

to be Designated Series D 7% Convertible

Preferred Stock

The undersigned officer of BlO-key International, Inc., a Delaware corporation (the “ Corporation ”), does hereby certify that the following resolutions were adopted by the Board of Directors of the Corporation (the “ Board ”) in accordance with Section 151 of the General Corporation Law of Delaware on November 9, 2009:

RESOLVED: That, in accordance with the Certificate of Incorporation of the Corporation (the “ Charter ”), a series of the Preferred Stock, $.0001 par value per share, of the Corporation (the “ Preferred Stock ”), be and it hereby is established, consisting of 100,000 shares, to be designated “Series D 7% Convertible Preferred Stock”; and that, subject to the limitations provided by law and the Charter, the powers, designations, preferences and relative, participating, optional or other special rights of, and the qualifications, limitations or restrictions upon, the Series D 7% Convertible Preferred Stock shall be as follows:

Section 1 . Designation and Amount .

The shares of such series shall be designated as the “Series D 7% Convertible Preferred Stock” (the “ Series D Shares ”) and the number of shares initially constituting such series shall be One Hundred Thousand (100,000) which may be issued in whole or fractional shares.

Section 2 . Dividends and Distributions .

(a) The holders of Series D Shares shall be entitled to receive dividends, when and as declared by the Board, at a rate of seven percent (7%) per annum of the liquidation preference of $100 per share, which shall be fully cumulative, prior and in preference to any declaration or payment of any dividend or other distribution on the Common Stock, $.0001 par value per share, of the Corporation (the “ Common Stock ”). No dividend shall be declared and/or paid on any shares of Common Stock unless a dividend is also declared and/or paid on the Series D Shares. The dividends on the Series D Shares shall accrue from the date of issuance of each share and shall be payable semi-annually on June 15 and December 15 of each year (each a “ Dividend Date ”) commencing on June 15, 2010, except that if any such date is a Saturday, Sunday or legal holiday (a “ Non-Business Day ”) then such dividend shall be payable on the next day that is not a Saturday, Sunday or legal holiday on which banks in the State of Delaware are permitted to be closed (a “ Business Day ”) to holders of record as they appear on the stock books of the Corporation on the applicable record date, which shall be not more than 60 nor less than 10 days preceding the payment date for such dividends, as fixed by the Board of Directors (the “ Record Date ”). The dividends shall be payable in shares of Common Stock (the “ Series D Payments-in-Kind ”) in accordance with Section 2 (b) below. The amount of dividends payable on the Series D Shares for any period that is shorter or longer than 30 days shall be computed on the basis of a 360-day year of twelve 30-day months.

(b) Each Series D Payment-in-Kind shall be equal in amount to that number of shares of Common Stock for which the dividend is paid that is equal in number to (i) the aggregate cash dividends payable with respect to such Series D Shares on the Record Date, divided by (ii) the Conversion Price. Certificates representing the Common Stock issuable in payment of any Series D Payment-in-Kind shall be delivered to each holder entitled to receive such Series D Payment-in-Kind (in appropriate denominations) on the Dividend Date.

(c) The holders of Series D Shares shall not be entitled to receive any dividends or other distributions except as provided in this Certificate of Designation of Series D Shares.

Section 3 .

Except as provided by applicable law or in this Certificate of Designation, the holders of the Series D Shares shall have no voting rights.

Section 4 . Liquidation, Dissolution, Winding Up or Certain Mergers or Consolidations .

If the Corporation shall adopt a plan of liquidation or of dissolution, or commence a voluntary case under the federal bankruptcy laws or any other applicable state or federal bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in any involuntary case under such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due and on account of such event the Corporation shall liquidate, dissolve or wind up, or upon any other liquidation, dissolution or winding up of the Corporation, or, unless approved by the holders of the outstanding Series D Shares, engage in a merger, plan of reorganization or consolidation in which the entity is not the surviving Corporation, then and in that event, no distribution shall be made to the holders of shares of Common Stock unless, prior thereto, the holders of the Series D Shares shall have received an amount in cash or equivalent value in securities or other consideration equal to the Liquidation Preference thereof.

If upon any liquidation, dissolution, winding up, merger, plan of reorganization or consolidation, the amount so payable or distributable does not equal or exceed the Liquidation Preference of the Series D Shares, then, and in that event, the amount of cash so payable, and amount of securities or other consideration so distributable, shall be shared ratably among the holders of the Series D Shares. For the purposes hereof, the term “ Liquidation Preference ” shall mean $100 per share with respect to each of the Series D Shares, plus any and all accrued unpaid dividends thereon.

Section 5 . Conversion .

(a) (i) Subject to the provisions for adjustment hereinafter set forth and the limitation of the number of shares of Common Stock issuable upon conversion set forth in Section 5(a)(ii) below, commencing upon issuance, each Series D Share shall be convertible in the manner hereinafter set forth into fully paid and nonassessable shares of Common Stock, at the option of the holder thereof, at any time at the principal office of the Corporation or any transfer agent for the Series D Shares, into the number of fully paid and nonassessable shares of Common Stock which results from dividing the “Conversion Price” (as defined below) into the Liquidation Preference. The initial “Conversion Price” shall be equal to $0.30. Upon conversion, all accrued or declared but unpaid dividends on the Series D Shares shall be paid in shares of Common Stock in the manner provided for Series D Payment-in-Kind in Section 2(b); provided , that the date of conversion of such Series D Shares shall be the “Record Date” for the purpose of calculating the Series D Payment-in-Kind.

(ii) Notwithstanding anything contained herein to the contrary, in no event (except while there is outstanding a tender offer for any or all of the shares of the Corporation’s Common Stock) shall any holder of any Series D Shares be entitled to convert Series D Shares, or shall the Corporation have the obligation to issue shares upon such conversion or in payment of any Series D Payment-in-Kind, to the extent that, after such conversion the sum of (A) the number of shares of Common Stock beneficially owned by such holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Series D Shares or unexercised portion of any warrants or other securities convertible into shares of Common Stock of the Corporation beneficially owned by such holder), and (B) the number of shares of Common Stock issuable upon the conversion of the Series D Shares with respect to which the determination of this proviso is being made, would result in beneficial ownership by such holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Corporation (after taking into account the shares to be issued to such Holder upon such conversion). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), except as otherwise provided in clause (A) of such sentence.

(b) Adjustments to Conversion Price :

(i) The following definitions shall apply for purposes of this Section:

(A) “Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities.

(B) “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock.

(or, pursuant to Section 5(b)(iii), deemed to be issued) by the Corporation after the Series D Original Issue Date (as defined below), other than shares of Common Stock issued or issuable:

(i) upon conversion of Series D Shares;

(ii) in a transaction described in Section 5(b)(vi);

(iii) pursuant to the terms of any stock grant, option, warrant, employment agreement, convertible debt or other written obligation, agreement or commitment to which the Corporation was a party as of the Series D Original Issue Date (as defined below);

(iv) by way of dividend or other distribution on shares of Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (i), (ii) or (iii);

(v) to consultants or other people providing services to the Corporation so long as such issuances do not exceed Five Hundred Thousand (500,000) shares of Common Stock (or options or warrants to purchase same) in the aggregate; or

(vi) pursuant to a stock option plan or stock purchase plan or other employee stock incentive program or agreement approved by the Board of Directors so long as such issuances do not exceed One Million (1,000,000) shares of Common Stock (or options or warrants to purchase same) in the aggregate.

(D) “Series D Original Issue Date” shall mean the date on which the first Series D Share was issued.

(ii) No Adjustment of Conversion Price : No adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is issued for consideration less than the Conversion Price in effect on the date of such issuance.

(iii) Deemed Issue of Additional Shares of Common Stock :

(A) Options and Convertible Securities : In the event the Corporation at any time or from time to time after the Series D Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefore, the exercise of such Options and conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(b)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued:

(i) except as provided in Section 5(b)(iii)(A)(ii) hereof, no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities;

(ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Corporation, or change in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (other than under or by reason of provisions designed to protect against dilution),

the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and

(iii) no readjustment pursuant to clause (ii) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (1) the Conversion Price on the original adjustment date or (2) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date.

(iv) Adjustment of Conversion Rate Upon Issuance of Additional Shares of Common Stock : In the event the Corporation shall issue Additional Shares of Common Stock without consideration or for a consideration per share less than the Conversion Price in effect on the date of and immediately prior to such issue, then and in each such event the Conversion Price shall automatically be reduced to a price equal to the lowest per share consideration received or to be received by the Corporation in connection with such issuance.

(v) Determination of Consideration . For purposes of this Section, the consideration received by the Corporation for the issuance of any Additional Shares of Common Stock shall be computed as follows:

(A) Cash and Property: Such consideration shall:

(i) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation;

(ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment; and

(iii) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined by the Board of Directors in the good faith exercise of its reasonable business judgment.

(B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(b) (iii)(A), relating to Options and Convertible Securities, shall be determined by dividing

(i) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by

(ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

(vi) Other Adjustments :

(A) Subdivisions, Combinations, or Consolidations of Common Stock: In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, stock dividend, combination or like event, into a greater or lesser number of shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision, combination, consolidation or stock dividend shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted.

(B) Reclassifications: In the case, at any time after the date hereof, of any capital reorganization or any reclassification of the stock of the Corporation (other than as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another person (other than a consolidation or merger (i) in which the Corporation is the continuing entity and which does not result in any change in the Common Stock or (ii) which is treated as a liquidation pursuant to Section 4 hereof), the Series D Shares shall, after such reorganization, reclassification, consolidation or merger be convertible into the kind and number of shares of stock or other securities or property of the Corporation or otherwise to which such holder would have been entitled if immediately prior to such reorganization, reclassification, consolidation or merger such holder had converted its Series D Shares into Common Stock. The provisions of this Section 5(b) shall similarly apply to successive reorganizations, reclassifications, consolidations or mergers.

(c) Fractional Shares . In lieu of any fractional shares to which the holder of a Series D Share would otherwise be entitled upon conversion, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board of Directors in the good faith exercise of its reasonable business judgment.

(d) Miscellaneous :

(i) All calculations under this Section 5 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be.

(ii) The holders of at least 50% of the outstanding Series D Shares shall have the right to challenge any determination by the Board of Directors of fair market value pursuant to this Section 5, in which case such determination of fair market value shall be made by an independent appraiser selected jointly by the Board of Directors and the challenging parties, the cost of such appraisal to be borne equally by the Corporation and the challenging parties.

(iii) No adjustment in the Conversion Price need be made if such adjustment would result in a change in such Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Conversion Rate.

(e) No Impairment . The Corporation will not, through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series D Shares against impairment.

(f) Reservation of Stock Issuable Upon Conversion . The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series D Shares and payment of dividends thereon, such number of its shares of Common Stock as shall from time to time be sufficient to effect (i) the conversion of all outstanding Series D Shares and (ii) the payment of three (3) years of dividends less any dividends previously paid on the Series D Shares as provided in Section 2(b). If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding Series D Shares and the payment of such dividends, the Corporation will

take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.

Section 6 . Reports as to Adjustments .

Whenever the Conversion Price or the type of securities, cash or other property into which the Series D Shares may be converted is adjusted as provided in Section 5 hereof, the Corporation shall promptly mail to the holders of record of the outstanding Series D Shares at their respective addresses as the same shall appear in the Corporation’s stock records, a notice stating that the Conversion Price has been adjusted and setting forth the new number of shares of Common Stock (or describing the new stock, securities, cash or other property) into which each Series D Share is convertible as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment became effective.

Section 7 . Mandatory Redemption .

(a) On December 31, 2010 (the “ Mandatory Redemption Date ”), the Corporation shall redeem all remaining outstanding Series D Shares at $100 per Series D Share, together with all accrued and unpaid dividends thereon (the “ Mandatory Redemption Price ”), in cash, to the Mandatory Redemption Date. Except as set forth in this Section, the Series D Shares shall not be subject to redemption.

(b) Notice of redemption (“ Mandatory Redemption Notice ”) shall be given by the Corporation with respect to the Series D Shares within ten (10) days prior to the Mandatory Redemption Date and shall be delivered by mail, first class postage prepaid, to each holder of record (at the close of business on the business day preceding the day on which notice is given) of the Series D Shares, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation, for the purpose of notifying such holder of the redemption to be effected.

(c) On the Mandatory Redemption Date, the Corporation shall pay by cash or wire transfer of immediately available funds to the person whose name appears on the certificate or certificates of the Series D Shares that (i) shall not have been converted pursuant to Section 5 hereof and (ii) shall have been surrendered to the Corporation in the manner and at the place designated in the Mandatory Redemption Notice, the Mandatory Redemption Price, and thereupon each surrendered certificate shall be canceled.

(d) If the funds of the Corporation legally available for redemption of the Series D Shares are insufficient to redeem the total number of Series D Shares outstanding on the Mandatory Redemption Date, the Series D Shares shall be redeemed (on a pro rata basis from the holders of the Series D Shares, from time to time), to the extent the Corporation is legally permitted to do so, the redemption obligations of the Corporation hereunder will be a continuing obligation until the Corporation’s redemption of all of the Series D Shares, and all rights of the holders of the Series D Shares and all obligations of the Corporation provided herein shall continue until the Series D Shares are redeemed in full.

(e) From and after the Mandatory Redemption Date, unless there shall have been a default in payment of the Mandatory Redemption Price, all rights of the holders of the Series D Shares (except the right to receive the Mandatory Redemption Price subsequent to the Mandatory Redemption Date upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If for any reason the Corporation shall not have paid the Mandatory Redemption Price to the holders of Series D Shares on the Mandatory Redemption Date, (i) the Series D Shares outstanding at such date shall accrue dividends at a rate of nine percent (9%) per annum of the Liquidation Preference from the Mandatory Redemption Date until the Mandatory Redemption Price is paid in full and (ii) all rights of the holders of the Series D Shares and obligations of the Corporation provided herein shall continue until the Mandatory Redemption Price is paid in full.

Section 8 . Reacquired Shares .

Any Series D Shares converted, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof, and, if necessary to provide for the lawful purchase of such shares, the capital represented by such shares shall be reduced in accordance with the General Corporation Law of Delaware. All such shares shall upon their cancellation become authorized but unissued

shares of Preferred Stock, $.0001 par value per share, of the Corporation and may be reissued as part of another series of Preferred Stock, $.0001 par value per share, of the Corporation.

Section 9 . Protective Provisions . So long as any shares of Series D Shares are outstanding, the Corporation shall not, without first obtaining the approval of the holders of a majority of the then outstanding Series D Shares:

(a) alter or change the rights, preferences or privileges of the Series D Shares;

(b) create or issue any new class or series of capital stock that is pari passu with, or has a preference over, the Series D Shares as to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Corporation (“ Senior Securities ”), or alter or change the rights, preferences or privileges of any Senior Securities so as to affect adversely the Series D Shares;

(d) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the holders of shares of the Series D Shares under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended);

(e) engage in a reverse stock split or other similar transaction with respect to the Common Stock;

(f) authorize, create, designate, issue or sell any class or series of preferred stock of the Corporation (including, but not limited to, Series D Shares or other shares of preferred stock or treasury stock) or rights, options, warrants or other securities convertible into or exercisable or exchangeable for Common Stock (other than any such rights, options, warrants or other securities convertible into or exercisable or exchangeable for Common Stock issued to employees of the Corporation in the ordinary course of their employment or consultants pursuant to Section 5(b)(i)(C)(v)) or any debt security which by its terms is convertible into or exchangeable for any Common Stock of the Corporation.

The approval requirement contained in this Section 9 shall apply to any action taken by officers, directors or shareholders of the Corporation resulting in any of the effects described in clauses (a) - (f) above, regardless of the form such action takes.

FURTHER RESOLVED: That such certificate of designation be, and it hereby is, approved and adopted by the Board; and that the officers of the Corporation, or any of them, hereby are authorized and directed to execute and file such certificate of designation with the Secretary of State of the State of Delaware; that the Board hereby is authorized to issue such shares of Series D 7% Convertible Preferred Stock from time to time and for such consideration and on such terms as the Board may determine; and that a sufficient number of shares of Common Stock hereby is reserved for issuance upon conversion of the Series D 7% Convertible Preferred Stock.

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IN WITNESS WHEREOF, BlO-key International, Inc. has caused this certificate to be signed by a duly authorized officer thereof on this day of December, 2009.

	BIO-KEY INTERNATIONAL, INC.


	By:
		Name:
		Title:

Exhibit 10.83

ASSET PURCHASE AGREEMENT

By And Between

BIO-KEY INTERNATIONAL, INC.

And

INTERACT911 MOBILE SYSTEMS, INC.

August 13, 2009

TABLE OF CONTENTS

(continued)

		Page

ARTICLE I	DEFINITIONS	1

1.1	Definitions	1

1.2	Other Definitions	8

ARTICLE II	PURCHASE AND SALE OF ASSETS	9

2.1	Purchase of Assets	9

2.2	Excluded Assets	12

2.3	Assumed Liabilities	12

2.4	Excluded Liabilities	12

2.5	BIO-key License	14

2.6	Purchase Price	14

2.7	Closing Transactions	14

2.8	Adjustments to Purchase Price	14

2.9	Transfer Documents	16

2.10	Tax Allocations	16

2.11	Transition of Subject Business	17

2.12	Nonassignable Contracts	17

ARTICLE III	REPRESENTATIONS AND WARRANTIES OF SELLER	18

3.1	Organization and Corporate Power	18

3.2	Authorization of Transactions	18

3.3	Sufficiency of Assets	19

3.4	Absence of Conflicts	19

3.5	SEC Filings; Financial Statements	19

3.6	Capitalization	21

3.7	Absence of Undisclosed Liabilities	22

3.8	Absence of Certain Changes	22

3.9	Title to Properties	22

3.10	Payment of Taxes	23

3.11	Contracts and Commitments	23

3.12	Seller Intellectual Property Assets	24

3.13	Litigation; Proceedings	26

TABLE OF CONTENTS

(continued)

		Page

3.14	Governmental Permits	27

3.15	Employees	27

3.16	Insurance	27

3.17	Affiliate Transactions	28

3.18	Compliance with Laws	28

3.19	Governmental Authorities and Consents	28

3.20	Product Warranties	28

3.21	Environmental Matters	28

3.22	Broker’s Fees	29

3.23	Disclosure	29

3.24	Accounts Receivable	29

3.25	Software and Information Systems	30

3.26	Customers and Suppliers	31

ARTICLE IV	REPRESENTATIONS AND WARRANTIES OF BUYER	32

4.1	Organization and Good Standing	32

4.2	Corporate Authorization	32

4.3	No Breach	33

4.4	Financial Information	33

4.5	Litigation; Proceedings	33

4.6	Availability of Funds	34

4.7	Broker’s Fees	34

4.8	Disclosure	34

ARTICLE V	COVENANTS	35

5.1	Conduct of Business	35

5.2	No Solicitation	36

5.3	Preparation of Proxy Statement; Seller Stockholders’ Meeting	38

5.4	Access to Information; Confidentiality	39

5.5	Reasonable Efforts	39

5.6	Notification of Certain Matters	40

5.7	Fees and Expenses	40

TABLE OF CONTENTS

(continued)

		Page

ARTICLE VI	CONDITIONS TO CLOSING	41

6.1	Conditions to Each Party’s Obligation to Closing	41

6.2	Conditions to Obligations of the Buyer	41

6.3	Conditions to Obligations of Seller	42

ARTICLE VII	Closing Deliveries	42

7.1	Seller’s Deliveries at Closing	42

7.2	Buyer’s Deliveries at Closing	43

ARTICLE VIII	TERMINATION, AMENDMENT AND WAIVER	44

8.1	Termination	44

8.2	Effect of Termination	45

8.3	Payments	45

ARTICLE IX	INDEMNIFICATION AND RELATED MATTERS	46

9.1	Survival; Risk Allocation	46

9.2	Indemnification	46

ARTICLE X	MISCELLANEOUS	50

10.1	Amendment	50

10.2	Waiver	51

10.3	Notices	51

10.4	Binding Agreement; Assignment	51

10.5	Severability	52

10.6	Construction	52

10.7	Captions	52

10.8	Entire Agreement	52

10.9	Counterparts	52

10.10	Governing Law	52

10.11	Parties in Interest	53

10.12	Consent to Jurisdiction	53

iii

INDEX OF EXHIBITS

Exhibit A	Form of Buyer Note
Exhibit B	Form of IP Security Agreement
Exhibit C	Form of Warrant
Exhibit D	Form of General Assignment
Exhibit E	Form of Trademark Assignment
Exhibit F	Form of Copyright Assignment
Exhibit G	Form of Third Party IP Licensor Consent and Waiver
Exhibit H	Form of Landlord Consent and Waiver
Exhibit I	Form of Noncompetition Agreement
Exhibit J	Form of Parent Guaranty
Exhibit K	Form of SilkRoad Guaranty

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “ Agreement ”) is made and entered into as of August , 2009, by and between BIO-key International, Inc., a Delaware corporation (“ Seller ”), and InterAct911 Mobile Systems, Inc., a Delaware corporation (“ Buyer ”). Seller and Buyer are collectively referred to herein as the “ Parties ” and each individually as a “ Party .”

WHEREAS, Buyer desires to acquire from Seller, and Seller desires to sell to Buyer, substantially all of the assets of Seller relating to Seller’s Law Enforcement Division for the consideration and upon the terms and conditions set forth in this Agreement; and

WHEREAS, Seller desires to issue, and Buyer desires to receive, a Warrant (as defined below) to purchase capital stock of Seller; and

WHEREAS, the Board of Directors of Seller has approved and declared advisable this Agreement and the sale of assets contemplated hereby, has deemed it in the best interests of stockholders of the Seller to consummate the sale and issue the Warrant, and has determined to recommend to stockholders of the Seller the adoption of this Agreement;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE I

DEFINITIONS

1.1 Definitions

For purposes of this Agreement, the following terms shall have the meanings set forth below:

“ Affiliate ” means with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person, where “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a Person, whether through the ownership of voting securities, by contract, as trustee or executor, or otherwise.

“ Alternative Transaction ” means with respect to Seller, any of the following transactions (other than the transactions contemplated hereby): (A) any acquisition or purchase from Seller by any Person or “group” (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of more than a Twenty Percent (20%) interest in the total outstanding voting securities of Seller or any tender offer or exchange offer that if consummated would result in any Person or “group” (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) beneficially owning securities representing Twenty Percent (20%) or more of the total outstanding voting power of Seller or any merger, consolidation, business combination, share exchange or similar transaction involving Seller pursuant to which the stockholders of Seller immediately preceding such transaction hold securities representing less than Eighty Percent (80%) of the total outstanding voting power of the surviving or resulting

entity of such transaction (or Seller entity of such surviving or resulting entity); (B) any sale, lease, exchange, mortgage, transfer, license or disposition of assets (including capital stock or other ownership interests in Subsidiaries) representing Twenty Percent (20%) or more of the aggregate fair market value of the consolidated assets of Seller and its Subsidiaries taken as a whole; or (C) any liquidation or dissolution of Seller.

“ Alternative Transaction Proposal ” means any offer, inquiry, proposal or indication of interest (whether binding or non-binding) to Seller or its stockholders, relating to an Alternative Transaction.

“ Applicable Law ” means all foreign, federal, state, local or municipal laws, statutes, ordinances, regulations, and rules, and all orders, writs, injunctions, awards, judgments and decrees of any Governmental Authority applicable to Buyer or Seller, their respective Subsidiaries or any of their respective assets, properties or businesses.

“ Business Day ” means any day that is not a Saturday, Sunday or other day on which banks are required or authorized by law to be closed in Boston, Massachusetts.

“ Buyer Note ” means the guaranteed, secured promissory note in the principal amount of Four Million Dollars ($4,000,000) issued by the Buyer in substantially the form attached hereto as Exhibit A and guaranteed by InterAct911 Corporation, a Delaware corporation and sole stockholder of Buyer (“ Parent ”), and SilkRoad Equity, LLC, a Delaware limited liability company (“ SilkRoad ” and together with Parent, the “ Guarantors ”), and secured by a pledge of the Seller Intellectual Property Assets pursuant to an Intellectual Property Security Agreement in substantially the form attached hereto as Exhibit B (the “ IP Security Agreement ”).

“ Change of Recommendation ” means the withholding, withdrawal, adverse amendment, qualification or modification of Seller’s Board of Directors’ recommendation in favor of approval of this Agreement and the transactions contemplated hereby, and, in the case of a tender or exchange offer made by a third party directly to Seller’s stockholders, a recommendation that Seller’s stockholders accept the tender or exchange offer.

“ Closing Cash Payment ” means the amount in cash to be paid to Seller at Closing equal to Seven Million Dollars ($7,000,000), plus the Net Amount of Working Capital Assets at Closing, all as set forth in the Estimated Closing Statement. The Closing Cash Payment is subject to further adjustment following the Closing in accordance with Section 2.8 hereof.

“ Contract ” means any contract, license, sublicense, mortgage, purchase order, indenture, loan agreement, lease, sublease, agreement, arrangement or understanding or instrument or any binding commitment to enter into any of the foregoing (in each case, whether written or oral).

“ Copyrights ” means all United States and foreign copyrights (including Community designs), including copyrights in both published and unpublished works, compilations, databases and computer programs, Software, manuals and other documentation, whether registered or unregistered, and, with respect to any and all of the foregoing: (A) all registrations and applications therefor, including the registrations and applications referred to in Schedule 3.12 , (B) all extensions and renewals thereof, (C) all derivatives, translations, adaptations and combinations of any and all of the foregoing; (D) all rights corresponding thereto throughout the

world, (E) all rights to sue for past, present and future infringements thereof, and (F) all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit.

“ Environmental Laws ” means any and all federal, state, foreign, interstate, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decisions, injunctions, decrees, requirements of any Governmental Authority, any and all common law requirements, rules and bases of liability regulating, relating to, or imposing liability or standards of conduct concerning pollution, Hazardous Materials or protection of human health, safety or the environment, as currently in effect, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 10601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C., Section 136 et seq., Occupational Safety and Health Act 29 U.S.C. Section 651 et seq., the Oil Pollution Act of 1990, 33 U.S.C. Section 2701 et seq., and the Endangered Species Act (16 U.S.C. Section 1531 et seq.) as such laws have been amended or supplemented, and the regulations promulgated pursuant thereto, and all analogous state or local statutes.

“ Environmental Liabilities ” means with respect to Seller, any and all Liabilities of or relating to Seller or any of its Subsidiaries (including any entity which is, in whole or in part, a predecessor of Seller or any of such Subsidiaries), which (A) arise under or relate to matters covered by Environmental Laws and (B) relate to actions occurring or conditions existing on or prior to the Closing Date.

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

“ GAAP ” means United States generally accepted accounting principles, consistently applied throughout the periods involved.

“ Governmental Authority ” means any foreign, federal, state, county, local, municipal or foreign court or tribunal, governmental or regulatory body, administrative board, bureau, agency, instrumentality, commission or any department or political subdivision thereof.

“ Governmental Permit ” means any consent, license, permit, grant, franchise, certificate of authorization, registration or other authorization of a Governmental Authority that is required for the operation of such entity’s business or the holding of any assets or properties or exercising any rights or claims.

“ Hazardous Materials ” means any substance material or waste regulated by any Governmental Authority, including those defined, listed, classified or regulated as radioactive, hazardous, toxic or otherwise dangerous to health or the environment in or under any Environmental Laws, such as petroleum, petroleum products, friable asbestos, urea formaldehyde, radioactive materials and polychlorinated biphenyls, but excluding office and janitorial supplies safely stored and maintained.

“ Hired Employees ” means the employees of Seller hired by Buyer at the Closing, all of whom are identified on Schedule 3.15 hereto.

“ Intellectual Property Assets ” means all worldwide intellectual property rights owned or licensed by Seller and used in the Subject Business, including (A) Patents; (B) Trademarks and all of the goodwill associated therewith; (C) Copyrights; (D) Trade Secrets; (E) any rights in registered internet domain names; (F) any and all other intellectual property rights relating to any of the foregoing.

“ Knowledge ” means the actual knowledge after reasonable inquiry of Seller’s Chairman of the Board and Chief Financial Officer (Thomas Colatosti), Chief Executive Officer (Michael DePasquale), Executive Vice President and General Manager of the Subject Business (Kenneth S. Sousa), Vice President for Programs and Customer Support (Roy A. Wickland), Controller (Cecilia Welch) or the Director of Contracts (Karen Hicks).

“ Letter of Intent ” means that certain letter agreement, dated June 15, 2009, between Parent and Seller.

“ Liability ” means any liability, debt, obligation, deficiency, Tax, penalty, assessment, fine, claim, cause of action or other loss, fee, cost or expense of any kind or nature whatsoever, whether asserted or unasserted, absolute or contingent, known or unknown, accrued or unaccrued, liquidated or unliquidated, and whether due or to become due and regardless of when asserted.

“ Lien ” means, with respect to any asset, any mortgage, pledge, security interest, encumbrance, lien, charge, claim or encumbrance of any kind in respect of such asset.

“ Material Adverse Effect ” means a material adverse effect on the business, assets, financial condition, or results of operations of the Subject Business.

“ Net Amount of the Working Capital Assets ” means the difference between (A) the current assets of the Subject Business, excluding cash and cash equivalents, and (B) the current liabilities of the Subject Business included in the Assumed Liabilities, but excluding deferred revenue (other than the Service Contracts Adjustment Amount) and including accrued and unused vacation pay and sick pay for Hired Employees. In determining the Net Amount of the Working Capital Assets, all amounts will be determined as of the Closing Date in accordance with GAAP applied in a manner consistent with the calculation of the Net Amount of the Working Capital Assets as of June 30, 2009 contained in Schedule 2.8 to this Agreement.

“ Ordinary Course ” means ordinary course of business consistent in nature, scope and magnitude with past custom and practice of such Person.

“ Patents ” means all United States and foreign patents and certificates of invention, patent rights, inventions, discoveries, invention disclosures and similar property rights, whether or not patented, and applications for any and all of the foregoing, including: (A) each Patent and Patent application referred to in Schedule 3.12 hereto (as such schedule may be amended or supplemented from time to time), (B) all reissues, divisions, continuations, continuations-in- part, extensions, renewals, and reexaminations thereof, (C) all rights corresponding thereto

throughout the world, (D) all inventions and improvements described therein, (E) all rights to sue for past, present and future infringements thereof, (F) all licenses, claims, damages, and proceeds of suit arising therefrom, and (G) all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit.

“ Person ” means any individual, partnership, limited liability company, corporation, cooperative, association, joint stock company, trust, estate, joint venture, unincorporated organization or Governmental Authority.

“ Prime Rate ” means, on any date, a variable rate per annum equal to the rate of interest most recently published by The Wall Street Journal as the “prime rate” at large U.S. banks.

“ Proxy Statement ” means the proxy statement to be filed by Seller with the SEC in connection with Seller’s Stockholders’ Meeting.

“ Public Software ” means any software that is licensed pursuant to an “open source” licensing agreement or similar agreement, including software licensed under the GNU General Public License (GPL) or the GNU Lesser/Library GPL, the Mozilla Public License, the Netscape Public License, the Sun Community Source License, the Sun Industry Standards License, the BSD License, and the Apache License.

“ Real Estate Lease ” means that certain Office Lease Agreement, dated as of June 30, 2008, between Seller and Normandy Nickerson Road, LLC, as lessor, governing the facilities occupied by Seller in Marlborough, Massachusetts.

“ SEC ” means the Securities and Exchange Commission.

“ Securities Act ” means the Securities Act of 1933, as amended.

“ Seller Intellectual Property Assets ” means all Intellectual Property Assets, including the Patents, Trademarks, Copyrights, Software and Trade Secrets, (A) owned by Seller or (B) for which Seller has a valid right or license to use, develop, make, have made, offer for sale, sell, modify, create derivative works from, license to third parties, and dispose of in connection with the Subject Business.

“ Service Contract ” means the Seller’s obligation to provide installation, consulting maintenance and other services to purchasers of Software Products pursuant to a written Contract.

“ Service Contracts Adjustment Amount ” means Fifteen Percent (15.0%) of Seller’s deferred revenue accounts attributable to the Subject Business. Deferred revenue will be determined as of the Closing Date in accordance with GAAP applied in a manner consistent with the determination of deferred revenue and the calculation of the Service Contracts Adjustment Amount as of June 30, 2009 contained in Schedule 2.8 to this Agreement.

“ Software ” means all computer software, including Source Code, object, executable or binary code, objects, comments, compliers, routines, screens, user interfaces, report formats,

templates, menus, buttons and icons and all files, data, materials, manuals, design notes and other items and documentation related thereto or associated therewith.

“ Software Products ” means all Software products which are designed, developed, licensed, sold, distributed and/or otherwise made commercially available in the operation of the Subject Business, consisting of the Software products and interfaces listed on Schedule 3.25(a)(iii) .

“ Source Code ” means, collectively, any human readable software source code, or any material portion or aspect of the software source code in Seller’s rightful possession which comprise part of the Seller Intellectual Property Assets. With regard to the Software Products, source code includes:

(a) any and all human readable software source code, which comprises part of the Software Products;

(b) the source code repository for same (with history of revisions);

(d) Build scripts/programs/unit tests/configuration files and documentation on build process for same;

(e) source code documentation of QA procedures and test plans in digital format for same; and

(f) specifications, programmers’ comments and notes, and all other materials (including assembly, linkage and other utilities) and documents reasonably necessary to enable a reasonably skilled programmer to understand and maintain the Software Products without reference to any other person or documentation.

“ Subject Business ” means Seller’s Law Enforcement Division, which is engaged in the development, manufacture, distribution, sale, installation and service of mobile data equipment, applications, access and authentications for law enforcement and public safety officials.

“ Subsidiary ” means, with respect to any Person, any corporation, partnership, limited liability company, association or other business entity of which such Person has a majority of the ownership interests therein or the contractual right to control.

“ Superior Proposal ” means with respect to Seller, an unsolicited, bona fide written Alternative Transaction Proposal, which the Board of Directors of Seller has in good faith determined (after consultation with its outside legal counsel and its financial advisor), taking into account all legal, financial, regulatory, timing and other aspects of the proposal, (A) is more favorable, from a financial point of view, to Seller’s stockholders (in their capacities as stockholders) than the terms of this Agreement (after giving effect to any adjustments to the terms of this Agreement proposed by the other party in response to such Alternative Transaction Proposal), (B) is fully financed or reasonably capable of being fully financed, and (C) is

reasonably likely to be consummated on the terms proposed; provided , however , that, for purposes of this definition of “Superior Proposal” each reference to “20%” or “80%” in the definition of “Alternative Transaction” shall be deemed to be a reference to “50%”.

“ Tax ” or “ Taxes ” means any federal, state, local or foreign income, gross receipts, capital gains, franchise, alternative or add-on minimum, estimated, sales, use, goods and services, transfer, registration, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, special assessment, personal property, capital stock, social security, unemployment, employment, disability, payroll, license, employee or other withholding, contributions or other tax, of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing.

“ Tax Assets ” means any refund, abatement or credit of, and all other assets comprising receivables or deferred assets or prepayments for, Taxes arising or resulting from Seller’s conduct of the Subject Business or ownership of the Purchased Assets for taxable periods ending on or before the Closing Date.

“ Tax Returns ” means returns, declarations, reports, claims for refund, information returns or other documents (including any related or supporting schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of Taxes of any party or the administration of any laws, regulations or administrative requirements relating to any Taxes.

“ Termination Fee ” means One Million Dollars ($1,000,000), payable in immediately available funds.

“ Trademarks ” means all United States and foreign trademarks, trade names, corporate names, company names, business names, fictitious business names, slogans, service marks, certification marks, collective marks, logos, other source or business identifiers, trade dress, designs and general intangibles of a like nature, whether registered or unregistered, and, with respect to any and all of the foregoing: (A) all registrations and applications therefor including the registrations and applications referred to in Schedule 3.12 (as such schedule may be amended or supplemented from time to time), (B) all extensions or renewals of any of the foregoing, (C) all of the goodwill of the business connected with the use of and symbolized by the foregoing, (D) the right to sue for past, present and future infringement or dilution of any of the foregoing or for any injury to goodwill, and (E) all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit.

“ Trade Secrets ” means all trade secrets and all other confidential or proprietary information and know-how, including customer lists, research in progress, algorithms, data, designs, processes, formulae, drawings, schematics, blueprints, flow charts, models, strategies, prototypes, techniques, Beta testing procedures and Beta testing results, whether or not such Trade Secret has been reduced to a writing or other tangible form, and including all documents and things embodying, incorporating, or referring in any way to such Trade Secret, including (A) the right to sue for past, present and future misappropriation or other violation of any Trade

Secret, and (B) all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit.

“ Transaction Documents ” means this Agreement, the Warrant and any other Contract or instrument contemplated hereby to which Seller or Buyer is a party.

“ Warrant ” means the warrant issued by Seller to SilkRoad to purchase up to Eight Million (8,000,000) shares of Seller’s Common Stock at a purchase price of $0.30 per share, expiring on the fifth anniversary of the Closing Date in the form attached hereto as Exhibit C .

1.2 Other Definitions

Each of the following defined terms has the meaning given such term in the Section set forth opposite such defined term:

Section Reference		Defined Term

Preamble		Agreement
2.10		Allocation
9.1(a)		Applicable Limitation Date
2.3		Assumed Liabilities
3.5(b)		Balance Sheet
9.2(c)(ii)		Basket
Preamble		Buyer
9.2(a)		Buyer Parties
9.2(c)(ii)		Cap
2.7		Closing
2.7		Closing Date
2.8(b)		Closing Statement
3.6(a)		Common Stock
2.8(b)		Dispute Notice
2.8(a)		Estimated Closing Statement
2.2		Excluded Assets
2.4		Excluded Liabilities
2.4(a)		Excluded Taxes
2.8(c)		Final Closing Cash Payment
3.5(b)		Financial Statements
4.4(a)		Guarantor Balance Sheet
4.4(a)		Guarantor Balance Sheet Date
4.4(b)		Guarantor Financial Statements
9.2(d)		Indemnified Party
9.2(d)		Indemnifying Party

Section Reference		Defined Term

2.8(d)		Independent Accounting Firm
3.17		Interested Person
2.11		In-Process Sales
2.8(b)		Item of Dispute
3.12(a)		Licenses In
3.12(a)		Licenses Out
9.2(a)		Loss
Preamble		Parties
Preamble		Party
3.6(a)		Preferred Stock
3.24(p)		Product Certifications
2.6		Purchase Price
2.1		Purchased Assets
3.11		Purchased Contracts
Preamble		Seller
3.6(b)		Seller Options
9.2(b)		Seller Parties
3.5(a)		Seller SEC Documents
3.25		Seller Software
3.2(c)		Seller Stockholder Approval
3.6(b)		Seller Warrants
3.12(e)		Third-Party Intellectual Property Assets
2.9		Transfer Documents
3.12(a)		Use
2.4(j)		Zoll

ARTICLE II

PURCHASE AND SALE OF ASSETS

2.1 Purchase of Assets

At the Closing, Buyer shall purchase, and Seller and each of its Subsidiaries shall sell, convey, assign, transfer and deliver to Buyer, free and clear of any Liens by appropriate instruments of conveyance reasonably satisfactory to Buyer, all assets, properties, rights, claims, titles and interests of every kind or nature owned, leased, licensed or otherwise held by Seller and each of its Subsidiaries (including indirect and other forms of beneficial ownership) as of the Closing Date held, used in the conduct of the Subject Business (the “ Purchased Assets ”), including, without limitation, all of the following assets, but excluding all Excluded Assets:

(a) all Seller Intellectual Property Assets, including all Software Products and related Software and Source Code;

(b) all goodwill of Seller relating to the Subject Business or any Purchased Asset, together with the right to represent to third-parties that Buyer is the successor to Seller in the Subject Business;

(c) all billed and unbilled accounts receivable of the Subject Business and all correspondence with respect thereto, including all trade accounts receivable, notes receivable from customers, vendor credits and rebates, and all other obligations or rights to receive payment from vendors or customers with respect to purchases or sales of goods or services, and accounts receivable from Hired Employees;

(d) all prepayments, prepaid expenses and similar assets used by Seller or held by, or on behalf of, Seller for use in connection with the Subject Business;

(e) all inventories, including finished goods, work in process, raw materials, packaging and supplies used by Seller or held by, or on behalf of, Seller for use in connection with the Subject Business;

(f) all rights existing under the Purchased Contracts, including Service Contracts, the License-In and License-Out Agreements, and the Real Estate Lease;

(g) all non-competition, non-disclosure, non-solicitation, assignment of designs and inventions, and similar agreements, with respect to the Subject Business, the Hired Employees and former employees of the Subject Business, including the agreements listed on Schedule 3.15 ;

(h) all lists and records pertaining to customers, suppliers, distributors, sales representatives, personnel and agents relating to the Subject Business, whether past or current;

(i) all claims, deposits, prepayments, warranties, guarantees, refunds, rebates, causes of action, rights of recovery, rights of set-off and rights of recoupment of every kind and nature relating to the Subject Business, including the deposit on the Real Estate Lease;

(j) all transferable licenses, permits or other governmental authorizations affecting or relating in any way to the Subject Business, including the items listed on Schedule 3.3 ;

(k) all hardware, computer equipment and similar equipment owned or licensed by Seller and used in the Subject Business, including the hardware listed on Schedule 3.3 ;

(l) all office equipment, furniture and furnishings, fixtures, display racks, shelves, decorations, supplies and other personal property used in the Subject Business;

(m) all information and data processing systems, programs, software and documentation thereof (including all electronic data processing systems, program specifications,

source codes, logs, input data and report layouts and formats, record file layouts, diagrams, functional specifications and narrative descriptions, flow charts and other related material) which are used or intended to be used in the conduct of the Business;

(n) all signs and signage containing names, logos or slogans used in the Business, whether or not current, except those that incorporate the name BIO-key in a way which cannot be eradicated;

(o) all technical, engineering, design, processing, manufacturing, operations or quality control information, whether or not current, including new developments, research and development reports inventions, know-how, processes, ideas and trade secrets and documentation thereof (including related papers, blueprints, drawings, prototypes, formulae, diaries, notebooks, specifications, designs, methods of manufacture and data processing Software), and all claims and rights related thereto;

(p) all Software Product information, including sample products, catalogues, brochures, videos, specifications and manuals, service and warranty records, creative materials, sales, promotional and marketing materials, whether or not current, including trade show booths, locations, equipment, signage and supplies, and all samples and information on the products and history of the Subject Business;

(q) all SKUs, uniform product identification and bar codes and other product designations and identifications;

(r) all technologies and communication systems used in the Subject Business, but excluding Seller’s websites and domain names;

(s) all claims against third parties related to or arising from the Subject Business or the Purchased Assets;

(t) all rights under confidentiality, standstill and other agreements with potential acquirors of the Subject Business;

(u) all insurance benefits, including rights, claims and proceeds, related to or arising from the Subject Business the Purchased Assets or the Assumed Liabilities;

(v) all books, records, ledgers, files, documents, correspondence, lists, studies and reports and other printed or written materials used by Seller or held by, or on behalf of, Seller for use in connection with the Subject Business and all rights related thereto; and including, without limitation, engineering information; and

(w) all other assets of any kind or nature of Seller relating primarily to the Subject Business, other than the Excluded Assets.

2.2 Excluded Assets

Notwithstanding the foregoing, the following assets are expressly excluded from the purchase and sale contemplated hereby (the “ Excluded Assets ”) and, as such, are not included in the Purchased Assets:

(a) Seller’s rights under or pursuant to this Agreement and the other Transaction Documents;

(b) Seller’s general ledger, accounting records, minute books, statutory books and corporate seal;

(d) any right to receive mail and other communications addressed to Seller relating to the Excluded Assets or the Excluded Liabilities;

(e) the capital stock of Seller or any Subsidiary of Seller;

(f) all cash, cash equivalents and bank accounts;

(g) all Trademarks or other indicia of origin of Seller in any of the following words, logos, stylized lettering, other designs and variants thereof: “BIO-key” or “BIO-key International”; and

(h) Tax Assets.

2.3 Assumed Liabilities

At the Closing, Buyer shall assume only the following Liabilities, solely to the extent such Liabilities were incurred in the Ordinary Course of the Subject Business (the “ Assumed Liabilities ”):

(a) those accounts payable and accrued and unused vacation and sick time owed to the Hired Employees included in the calculation of the Final Net Amount of the Working Capital Assets which relate solely to the Ordinary Course of operations of the Subject Business and which are (i) accrued on the June 30, 2009 Balance Sheet or (ii) incurred in the Ordinary Course of business since June 30, 2009 and not discharged as of the Closing Date; and

(b) all Liabilities and obligations arising from and after the Closing Date under the Purchased Contracts (other than Liabilities or obligations attributable to any failure by Seller to comply with the terms thereof).

2.4 Excluded Liabilities

Notwithstanding any provision in this Agreement or any other writing to the contrary, Buyer is assuming only the Assumed Liabilities and is not assuming any other Liability or obligation of Seller (or any predecessor owner of all or part of its business and assets) of whatever nature, whether presently in existence or arising or asserted hereafter. All such other

Liabilities and obligations shall be retained by and remain obligations and Liabilities of Seller (all such Liabilities and obligations not being assumed being herein referred to as the “ Excluded Liabilities ”). Without limiting the foregoing, none of the following shall be Assumed Liabilities for the purposes of this Agreement:

(a) any and all Liabilities and obligations for Taxes of Seller of any kind, including Taxes relating to the Subject Business for any pre-closing tax period, and any and all other Liabilities and obligations of Seller for Taxes that arise as a result of the transactions contemplated by this Agreement;

(b) any Liabilities or obligations relating to employee pensions, benefits or compensation arrangements incurred or accrued prior to the Closing Date;

(d) any Liability, Lien or obligation relating to an Excluded Asset;

(e) any Liability or obligation not incurred in the Ordinary Course of the Subject Business;

(f) Seller’s obligations to provide vacation time, sick time, personal days, vacation pay and sick pay to any employees; provided , however , that Buyer will assume and be responsible for any accrued and unused vacation time and sick time owed to the Hired Employees to the extent included in the Net Amount of the Working Capital Assets;

(g) Any Liabilities resulting from any action, suit, proceeding, order, judgment, decree or investigation of Seller or the Subject Business, whether or not arising out of or related to the conduct of the Subject Business, prior to the Closing Date;

(h) any Liabilities of Seller which may be owed to any agent, broker, finder or investment or commercial banker as a result of the transactions contemplated by this Agreement;

(i) any Liabilities related to or arising from Seller’s Contract with Dataradio Corporation or claims by Dataradio Corporation that Seller has breached and defaulted under such Contract; and

(j) any Liabilities to Zoll Data Systems, Inc., a Delaware corporation (“ Zoll ”) or its Affiliates, including Liabilities and obligations pursuant to the Asset Purchase Agreement, dated May 22, 2007, between Seller and Zoll.

Except for the Assumed Liabilities expressly set forth in Section 2.3 hereof, Seller shall forever defend, indemnify and hold harmless Buyer from and against any and all Liabilities or obligations, losses, claims, damages (including incidental and consequential damages), costs and expenses (including court costs and reasonable attorneys’ fees) related to or arising from the Subject Business prior to the Closing Date.

2.5 BIO-key License

Seller hereby grants Buyer, for a period of ninety (90) days from and after the Closing, a non-exclusive, royalty-free right and license to use, in connection with Buyer’s ownership of the Purchased Assets and operation of the Subject Business, the trademark “BIO-key” on any and all packaging, brochures or other materials included within the Purchased Assets on which such trademark appears as of the Closing, only in the same style and manner in which the trademark was used by the Subject Business prior to Closing and only to identify those unmodified products offered by the Subject Business prior to Closing. All goodwill resulting from the use of the “BIO-key” trademark shall inure to the benefit of Seller. After such ninety (90) day period, Buyer shall, at its sole cost and expense, remove, obliterate, cover or replace, as appropriate, all packaging, brochures or other materials containing any Trademarks or other indicia of origin of Seller or any of its Affiliates. From and after the Closing, Buyer shall be entitled to designate itself as the successor to Seller with respect to the Software Products and the Subject Business.

2.6 Purchase Price

The consideration to be paid by Buyer to Seller for the Purchased Assets, the Warrant and the license granted pursuant to Section 2.5 (the “ Purchase Price ”) shall be Eleven Million Dollars ($11,000,000), consisting of the Closing Cash Payment, as adjusted in accordance with Section 2.8(a) hereof, and the Buyer Note. On the Closing Date, Buyer shall (i) pay the Closing Cash Payment, as adjusted in accordance with Section 2.8(a) , to Seller by wire transfer, and (ii) deliver the Buyer Note to Seller. Buyer and Seller shall execute and deliver a General Assignment, Bill of Sale and Assumption of Liabilities, in substantially the form attached hereto as Exhibit D (the “ General Assignment ”, as well as the other Transaction Documents and Closing deliveries contemplated by Article VI of this Agreement.

2.7 Closing Transactions

Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Choate Hall & Stewart LLP, Two International Place, Boston, Massachusetts, at 10:00 a.m. Eastern Time on the second Business Day following the satisfaction or waiver of all conditions of the Parties to consummate the transactions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as Buyer and Seller may mutually determine (the “ Closing Date ”). All transactions contemplated herein to occur on and as of the Closing Date shall be deemed to have occurred simultaneously and to be effective as of the close of business on such date.

2.8 Adjustments to Purchase Price

(a) Estimated Closing Statement . At least three (3) Business Days prior to the Closing Date, Seller shall deliver to Buyer (i) Seller’s good faith written estimates in reasonable detail of each of the components of the Net Amount of the Working Capital Assets as of the close of business on the Closing Date, including an estimate of the Service Contracts Adjustment Amount as of the close of business on the Closing Date, the Closing Cash Payment and the Purchase Price (the “ Estimated Closing Statement ”) and (ii) supporting work papers used in

preparing such calculations. The Estimated Closing Statement shall be calculated in accordance with GAAP, and shall be reasonably acceptable to Buyer. The Estimated Closing Statement shall be prepared in a manner consistent with the preparation of the sample calculations of the Net Amount of the Working Capital Assets, the Service Contracts Adjustment Amount, the Closing Cash Payment and the Purchase Price as of June 30, 2009, attached hereto as Schedule 2.8 ;

(b) Closing Statement . Promptly, but in any event within thirty (30) days after the Closing, Buyer shall furnish to Seller a written statement (the “ Closing Statement ”) setting forth as of the Closing Date, the Assumed Liabilities, the Net Amount of the Working Capital Assets, the Service Contracts Adjustment Amount, the Closing Cash Payment and the Purchase Price. The Closing Statement shall include the amount of each of the components of the Net Amount of the Working Capital Assets. Unless, within the fifteen day period following Seller’s receipt of the Closing Statement, Seller delivers written notice to Buyer (the “ Dispute Notice ”) setting forth (in detail sufficient for Buyer to understand the nature of and basis for Seller’s dispute) any and all items of disagreement related to the Closing Statement, including the amount thereof (each, an “ Item of Dispute ”), the Closing Statement shall be conclusive and binding upon each of the Parties; provided, however, that the only basis on which Seller shall be permitted to submit an Item of Dispute is that such Item of Dispute was not prepared in accordance with the terms of this Agreement or the Closing Statement contains a mathematical or clerical error or errors. After the delivery of the Closing Statement, Buyer shall cooperate with Seller in connection with its review of the Closing Statement, including providing Seller and its accountants reasonable access during business hours to materials used in the preparation of the Closing Statement. If, for whatever reason, Buyer does not furnish the Closing Statement within thirty (30) days after the Closing, the Estimated Closing Statement shall be conclusive and binding upon each of the Parties.

(c) Dispute Resolution by the Parties . If Seller delivers a Dispute Notice to Buyer within the required fifteen day period, Buyer and Seller shall use reasonable efforts to resolve their differences concerning the Items of Dispute, and if any Item of Dispute is so resolved, the Closing Statement shall be modified as necessary to reflect such resolution. If all Items of Dispute are so resolved, the Closing Statement (as so modified) shall be conclusive and binding on all Parties.

(d) Determination by Independent Accounting Firm . If any Item of Dispute remains unresolved for a period of thirty (30) days after Buyer’s receipt of the Dispute Notice, Buyer and Seller shall, within ten (10) days thereafter, submit the dispute to a mutually acceptable independent public accounting firm (the “ Independent Accounting Firm ”). If Buyer and Seller are unable to mutually agree upon such an accounting firm within such 10-day period, then Buyer and Seller shall, within five days thereafter, each select a nationally recognized certified public accounting firm. Within five days after their selection, those two accounting firms shall select a third nationally recognized certified public accounting firm, which third accounting firm shall act as the Independent Accounting Firm. Such third nationally recognized accounting firm shall not be an accounting firm that has performed accounting or similar services for Buyer or Seller in the past five years. Buyer and Seller shall each provide their respective calculations of the Net Amount of the Working Capital Assets and the Items of Dispute in writing to the Independent Accounting Firm and shall request that the Independent

Accounting Firm render a written determination as to each unresolved Item of Dispute, as soon as reasonably practicable, but in no event later than thirty (30) days after its retention, which determination shall be solely based on whether each such Item of Dispute was prepared in accordance with the terms of this Agreement or whether each such Item of Dispute contains a mathematical or clerical error or errors. The Parties shall cooperate fully with the Independent Accounting Firm so as to enable it to make such determination as quickly and as accurately as practicable. The Independent Accounting Firm’s determination as to each Item of Dispute submitted to it shall be in writing and shall be conclusive and binding upon the Parties, absent manifest error or willful misconduct, and the Closing Statement shall be modified to the extent necessary to reflect such determination. The fees and expenses of the Independent Accounting Firm shall be paid by the Party whose calculation of the Net Amount of the Working Capital Assets is furthest from the determination rendered by the Independent Accounting Firm.

(e) Adjustment . Once all Items of Dispute are resolved, the Net Amount of the Working Capital Assets set forth on the final Closing Statement (the “ Final Net Amount of the Working Capital Assets ”) shall be deemed final for the purposes of this Section 2.8 .

2.9 Transfer Documents

At Closing, Seller and Buyer shall execute and deliver the General Assignment and Seller shall execute and deliver such other instruments of assignment (collectively, the “ Transfer Documents ”) documenting the purchase and sale of each portion of the Purchased Assets and the Assumed Liabilities to be conveyed to Buyer. The Transfer Documents shall include a Trademark Assignment (the “ Trademark Assignment ”) and Copyright Assignment (the “ Copyright Assignment ”), in substantially the forms attached hereto as Exhibits E and F , respectively, as well as a Third Party IP Licensor’s Consent and Waiver (“ Third Party IP Licensor Consent and Waiver ”), and the Landlord’s Consent and Waiver (“ Landlord Consent and Waiver in substantially the forms attached hereto as Exhibits G and H , respectively. Seller shall execute and deliver the Warrant and the Noncompetition Agreement (the “ Noncompetition Agreement ”) in the form attached hereto as Exhibit I . Buyer shall cause the Parent Guaranty in substantially the form attached hereto as Exhibit J (the “ Parent Guaranty ”) and the SilkRoad Guaranty in substantially the form attached hereto as Exhibit K (the “ SilkRoad Guaranty ”) to be executed and delivered by each respective Guarantor. In the event of any conflict or inconsistency between the terms and conditions of this Agreement and any Transfer Document, the terms and conditions of this Agreement shall prevail.

2.10 Tax Allocations

Within two hundred seventy (270) days after the Closing Date, Buyer shall prepare and deliver to Seller a schedule allocating the Purchase Price (and any other items or amounts that are required for federal income tax purposes to be included in the Purchase Price), among the Purchased Assets, the Warrant and the Noncompetition Agreement under the principles of Code Section 1060 and regulations thereunder (and any similar provision of state, local or foreign law, as appropriate) (such schedule and the allocations it contains, the “ Allocation ”). The Allocation shall be binding and conclusive and deemed accepted by Seller, unless Seller shall have notified Buyer in writing of any objections thereto within twenty (20) days after delivery of the Allocation, specifying in reasonable detail each item on the Allocation that Buyer disputes. Upon

receipt of such objections, Buyer and Seller shall attempt in good faith to resolve such differences. If Seller and Buyer are unable to resolve such differences, they shall submit their differences to an independent accounting firm mutually acceptable to them whose determination shall be final, binding and conclusive on the Parties. Seller and Buyer shall report and file all Tax Returns (including amended Tax Returns and claims for refund) consistent with the Allocation and shall not voluntarily take a position contrary thereto or inconsistent therewith (including, without limitation, in any audits or examinations by any governmental authority or any other proceedings). Seller and Buyer shall cooperate in the filing of any forms (including Form 8594 under Section 1060 of the Code) with respect to such Allocation, including any amendments to such forms required with respect to such Allocation.

2.11 Transition of Subject Business

(a) Following the Closing, Seller will use its commercially reasonable efforts to facilitate and assist in the transition of the Subject Business to Buyer, including (i) directing phone, e-mail and other inquiries and contacts concerning the Subject Business to Buyer, (ii) assisting Buyer in obtaining maintenance agreements and necessary consents from customers of the Subject Business (including if necessary by joining Buyer personnel in calling on such customers), (iii) providing Buyer with a written list of all on-going sales currently in process (“ In-Process Sales ”), such list to detail the scope, terms and contact personnel for the In-Process Sales, (iv) causing Seller’s sales personnel who are currently working on any In-Process Sales to complete such effort and close such sales (subject to Buyer reimbursing Seller for the Ordinary Course sales commissions due on such sales); and (v) making available the services of Seller’s Controller.

(b) From and after the Closing, if Seller or any of its Subsidiaries or Affiliates receives or collects any funds relating to any accounts receivable of the Subject Business or any other Purchased Asset, such Person shall remit such funds to Buyer within five (5) Business Days after its receipt thereof.

(c) From and after the Closing, Seller will post and maintain a link to Buyer’s website for the Subject Business on Seller’s website.

2.12 Nonassignable Contracts

(a) To the extent that the assignment of any Purchased Contract included in the Assumed Liabilities or Purchased Assets is not permitted without (i) the consent of the other party to the Purchased Contract, (ii) the approval of Buyer as a source of the products or services called for by the Purchased Contract or (iii) the approval of Buyer as a lessee, then this Agreement shall not be deemed to constitute an assignment or an attempted assignment of the same, if such assignment or attempted assignment would constitute a breach thereof. However, unless otherwise agreed as to any particular Purchased Contract, Seller shall use its best efforts to obtain any and all such consents, approvals and novations before, if unable to do so prior to Closing, and after Closing.

(b) If any necessary consent, approval or novation is not obtained, Seller shall cooperate with Buyer in any reasonable arrangement designed to provide Buyer with all of the

benefits and obligations under such Purchased Contract, as if such consent, approval or novation had been obtained, including subleases from Seller and, undertakings by Buyer of the work necessary to complete contracts as the agent of Seller with the understanding that Seller shall then invoice the customer for services rendered and promptly remit the amount of the receivable to Buyer. Nothing herein shall excuse Seller from responsibility for any of its representations and warranties or covenants hereunder.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

As a material inducement to Buyer to enter into this Agreement, subject to the exceptions and limitations set forth in this Article III and the matters set forth on the Schedules, Seller hereby represents and warrants to Buyer that:

3.1 Organization and Corporate Power

Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware. Seller is qualified to conduct the Subject Business in every jurisdiction in which such qualification is necessary, except where the failure to so qualify has not had or would not reasonably be expected to have a Material Adverse Effect. All jurisdictions in which Seller conducts the Subject Business and is qualified to do business are set forth on Schedule 3.1 . Seller has full corporate power and authority and all licenses, permits and authorizations necessary to own and operate the Subject Business as now conducted.

3.2 Authorization of Transactions

(a) Seller has full corporate power and authority to execute and deliver this Agreement, the Warrant, the Noncompetition Agreement and each of the other Transaction Documents to which it is a party and, subject to receipt of the Seller Stockholder Approval, to consummate the transactions contemplated hereunder and thereunder and to perform each of its obligations hereunder and thereunder. The board of directors of Seller has duly approved this Agreement, the Warrant, the Noncompetition Agreement and each of the other Transaction Documents to which it is a party and has duly authorized the execution and delivery of this Agreement, the Warrant, the Noncompetition Agreement and each of the other Transaction Documents to which Seller is a party and the consummation of the transactions contemplated hereby and thereby. Except for the Seller Stockholder Approval and as otherwise set forth on Schedule 3.2 , no other corporate proceedings on the part of Seller (including, without limitation, approval of Seller’s stockholders) are necessary to approve and authorize the execution and delivery of this Agreement, the Warrant, the Noncompetition Agreement and each of the other Transaction Documents to which Seller is a party and the consummation of the transactions contemplated hereby and thereby. This Agreement has been and the Warrant, the Noncompetition Agreement and each of the other Transaction Documents to which Seller is a party will be duly executed and delivered by Seller and constitute the valid and binding agreements of Seller, enforceable against Seller in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general principles of equity.

(b) Board Approval . The Board of Directors of Seller has (i) determined that this Agreement, the Warrant and the other Transaction Documents are advisable and fair to and in the best interests of Seller and its stockholders, (ii) duly approved this Agreement, the Warrant and the other transactions contemplated hereby, which approval has not been rescinded or modified, (iii) resolved (subject to Section 6.2(d) ) to recommend this Agreement, and the Warrant to Seller’s stockholders for approval, and (iv) directed that this Agreement and the Warrant be submitted to Seller’s stockholders for consideration in accordance with this Agreement.

(c) Stockholder Approval . Except as set forth on Schedule 3.2 , the affirmative vote of a majority of the votes cast by stockholders of Seller entitled to vote thereon at the Seller’s Stockholders’ Meeting (as defined below) ( provided , however , that such affirmative vote also represents over 50% in interest of all outstanding capital stock of Seller entitled to vote thereon), is the only vote of the holders of any class or series of capital stock of Seller necessary to approve this Agreement, the Warrant and the Transactions contemplated hereby (the “ Seller Stockholder Approval ”).

3.3 Sufficiency of Assets

The Purchased Assets are sufficient to enable Buyer to conduct the Subject Business following the Closing in substantially the same manner as operated by Seller prior to the Closing. Schedule 3.3 contains a complete and correct list of the depreciable assets of the Subject Business.

3.4 Absence of Conflicts

Except as set forth on Schedule 3.4 or Schedule 3.11(e) attached hereto, the execution, delivery and performance of this Agreement, the Warrant, the Noncompetition Agreement and the other Transaction Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby by Seller do not and shall not (a) conflict with or result in any breach of any of the terms, conditions or provisions of, (b) constitute a default under, (c) result in a violation of, (d) give any third-party the right to modify, terminate or accelerate or cause the modification, termination or acceleration of, any obligation under, (e) result in the creation of any Lien upon any of the Purchased Assets, or (f) require any authorization, consent, approval, exemption or other action by, or notice or declaration to or filing with, any third-parties, including any court or administrative or other governmental body or agency, under (i) the provisions of the certificate of incorporation or bylaws of Seller, (ii) any Purchased Contract, (iii) any law, statute, rule or regulation to which Seller is subject, (iv) any judgment, order or decree to which Seller is subject, or (v) any other contract, license, instrument or agreement to which Seller is a party or to which it, the Subject Business or the Purchased Assets are subject.

3.5 SEC Filings; Financial Statements

(a) Seller has timely filed with the SEC all forms, reports, schedules, statements and other documents required to be filed by it since January 1, 2007 under the Exchange Act or the Securities Act, including all such documents filed after the date hereof and prior to the Closing Date (as such documents have been amended since the time of their filing

and all documents incorporated by reference therein, collectively, the “ Seller SEC Documents ”). None of Seller’s Subsidiaries is required to file any form, report, schedule, statement or other document with the SEC. As of their respective dates and if amended prior to the date hereof, as of the date of the last such amendment, the Seller SEC Documents (i) did not, and all documents filed by Seller with the SEC under the Exchange Act or the Securities Act between the date of this Agreement and the Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were or will be made, not misleading, and (ii) complied, and all documents filed by Seller with the SEC under the Exchange Act or the Securities Act between the date of this Agreement and the Closing Date will comply, in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, at such time of filing. As used in this Section 3.5 , the term “file” shall be construed to include any manner in which a document or information is furnished, supplied or otherwise made available to the SEC.

(b) The balance sheet of the Subject Business, dated June 30, 2009, attached hereto as Schedule 3.5 (the “ Balance Sheet ”) and each of the financial statements (including in each case, any related notes thereto), contained or reflected in Seller SEC Documents, (the “ Financial Statements ”) (i) was, and all financial statements contained or reflected in documents filed by Seller with the SEC under the Exchange Act or the Securities Act between the date of this Agreement and the Closing Date will be, prepared from the books and records of Seller and its Subsidiaries; (ii) was, and all financial statements contained or reflected in documents filed by Seller with the SEC under the Exchange Act or the Securities Act between the date of this Agreement and the Closing Date will be, prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated therein or in the notes thereto or, in the case of unaudited statements, except that such unaudited statements do not contain footnotes as permitted by Form 10-Q under the Exchange Act); (iii) complied in all material respects with all applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as in effect on the date of filing; (iv) except with respect to the unaudited financial statements contained in Seller SEC Documents filed on Form 10-Q under the Exchange Act, was accompanied by reports (qualified to the extent set forth therein) from the independent auditor opining on the same as to the financial statements contained therein; and (v) fairly presents, and all financial statements contained or reflected in documents filed by Seller with the SEC under the Exchange Act or the Securities Act between the date of this Agreement and the Closing Date will fairly present, in all material respects, the consolidated financial position of Seller and its Subsidiaries as of their respective dates and the consolidated results of their respective operations and cash flows for the periods indicated therein, except that the unaudited interim financial statements were or will be subject to normal year end audit adjustments which were not and will not be expected to be material in the aggregate.

(c) Neither Seller nor, to the Knowledge of Seller, any of its auditors, accountants or representatives, has received or otherwise obtained knowledge of any material complaint, allegation, assertion or claim, whether written or, to the Knowledge of Seller, oral, regarding the accounting or auditing practices, procedures, methodologies or methods of Seller or its internal accounting controls, including any material complaint, allegation, assertion or claim that Seller has engaged in questionable accounting or auditing practices.

3.6 Capitalization.

(a) Capital Stock . The authorized capital stock of Seller consists solely of 170,000,000 shares of Common Stock, par value $.0001 per share (the “ Common Stock ”), and 5,000,000 shares of Preferred Stock, par value $.0001 per share (the “ Preferred Stock ”), of which (i) 100,000 shares have been designated Series A Convertible Preferred Stock (the “ Series A Preferred Stock ”), (ii) 1,000,000 shares have been designated Series B Convertible Preferred Stock (the “ Series B Preferred Stock ”), and (iii) 600,000 shares have been designated Series C Convertible Preferred Stock (the “ Series C Preferred Stock ”). As of the date of this Agreement, [ ] shares of Common Stock are issued and outstanding, 30,557 shares of Series A Preferred Stock are issued and outstanding, 970,612 shares of Series B Preferred Stock are issued and outstanding, and 592,032 shares of Series C Preferred Stock are issued and outstanding. No shares of Common Stock or Preferred Stock are held in treasury by Seller and its Subsidiaries. All issued and outstanding shares of Common Stock and Preferred Stock have been, and all shares of Common Stock issued pursuant to the Warrant will be, duly authorized and validly issued, fully paid and nonassessable, and are not subject to preemptive rights created by Applicable Law, Seller’s certificate of incorporation or any Contract to which Seller is a party or by which it is bound.

(b) Stock Options, Purchase Plans, Restricted Stock Units and Convertible Securities . As of the date of this Agreement, [ ] shares of Common Stock are subject to issuance pursuant to outstanding options under the Seller’s stock incentive plans (the “ Seller Options ”), and [ ] shares of Common Stock are subject to issuance pursuant to outstanding options outside of the Seller’s stock incentive plans. [ ] shares of Common Stock are reserved for future issuance under the Seller’s stock incentive plans (excluding shares subject to issuance pursuant to Seller Options). [ ] shares of Common Stock are subject to issuance pursuant to outstanding warrants of Seller (the “ Seller Warrants ”), and [ ] shares are reserved for issuance upon conversion of the outstanding Preferred Stock. As of the Closing Date, Eight Million (8,000,000) shares of Common Stock will be reserved for issuance under the Warrant. All shares of Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. There are no outstanding or authorized stock appreciation, profit participation (other than Seller bonus plans), “phantom stock”, or other similar plans or Contracts with respect to Seller or any of its Subsidiaries.

(c) No Other Rights . Except for the Preferred Stock, the Seller Options, the Seller Warrants and as otherwise set forth in Section 3.6(b) or Schedule 3.6(c) , there are no options, warrants, convertible or exchangeable, securities, calls, rights, commitments, conversion privileges or preemptive or other rights or Contracts (to which Seller or any of its Subsidiaries is a party or by which Seller or any of its Subsidiaries is bound) outstanding to purchase or otherwise acquire any shares of capital stock of Seller or any of its Subsidiaries or any securities or debt exercisable for, convertible into or exchangeable for capital stock of Seller or any of its Subsidiaries, or obligating Seller or any of its Subsidiaries to issue, grant, extend or enter into any such option, warrant, convertible or exchangeable, securities, call, right, commitment, conversion privilege or preemptive or other right or Contract. Except as set forth on Schedule 3.6(c) , the Seller’s certificate of incorporation does not provide, and neither Seller nor any of its

Subsidiaries is a party to or otherwise bound by any Contract providing, for registration rights, rights of first refusal in favor of a third party, preemptive rights, co-sale rights, antidilution rights, redemption rights or other similar rights or other restrictions applicable to any outstanding securities of Seller or its Subsidiaries. Neither Seller nor any of its Subsidiaries is a party to or otherwise bound by any Contract (including any voting agreement), voting trust or proxy, other than proxies to be submitted in connection with the Seller Stockholders’ Meeting) regarding the voting of any outstanding securities of Seller or its Subsidiaries.

3.7 Absence of Undisclosed Liabilities

There are no Liabilities of the Subject Business of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a Liability, other than (i) Liabilities reflected on the Balance Sheet, (ii) incurred in the Ordinary Course of business since the date of the Balance Sheet, (iii) express warranty obligations and maintenance obligations specifically set forth in the Service Contracts or (iv) obligations set forth in the Purchased Contracts (excluding for purposes of this Subsection (iv), the Service Contracts).

3.8 Absence of Certain Changes

(a) Seller does not have any Knowledge of any development or threatened action that may have a Material Adverse Effect on the continued operation of the Subject Business or the Purchased Assets.

(b) Since January 1, 2009, with respect to the Subject Business or the Purchased Assets, there has not been:

(i) any operation of Seller out of the Ordinary Course of business or any change in the financial condition of the Subject Business or the Purchased Assets, which change, by itself or in conjunction with all other such changes, whether or not arising in the Ordinary Course of business, is likely to have a Material Adverse Effect with respect to the Subject Business or the Purchased Assets;

(ii) any purchase, sale, license or other disposition, or, except for the Letter of Intent, any agreement or other arrangement for the purchase, sale, license or other disposition, of any part of the Subject Business or the Purchased Assets, other than purchases in the Ordinary Course of business;

(iii) any increase in the salary, bonus, or other compensation payable to any Hired Employee, except as set forth on Schedule 3.15 ; and

(iv) any agreement, arrangement or understanding, whether in writing or otherwise, for Seller to take any of the actions specified in paragraphs (i) through (iii) above.

3.9 Title to Properties

Seller owns good and marketable title, free and clear of all Liens, to all of the Purchased Assets.

3.10 Payment of Taxes

Within the times and in the manner prescribed by law, Seller has filed all Tax Returns required to be filed by it and has paid all Taxes due and payable by it, except such as are being contested in good faith. No Tax due and owing by Seller on account of business transacted by Seller prior to the Closing Date will become a Lien on the Purchased Assets nor shall Buyer have any Liability therefor.

3.11 Contracts and Commitments

(a) Schedule 3.11(a) attached hereto contains an accurate and complete list of all Contracts related to the Subject Business and meeting any of the descriptions set forth below to which Seller or any Subsidiary is a party or bound or by which any of the Purchased Assets are subject or bound, or pursuant to which Seller or any Subsidiary is a beneficiary (the “ Purchased Contracts ”):

(i) Contracts obligating Seller to pay, as guarantor or otherwise, any indebtedness or in any way creating any Lien on any of the Purchased Assets;

(ii) Licenses In, Licenses Out or royalty Contracts;

(iii) Management, consulting or advisory Contracts;

(iv) Contracts for the purchase or sale of supplies or products or for the furnishing or receipt of services which has a minimum duration of one year or more or involves a sum in excess of $25,000, in each case to the extent any such Contract is not terminable by Seller without the payment of any fee or other amount on no more than thirty (30) days notice;

(v) Contracts limiting the freedom of Seller, or that would limit the freedom of Buyer after the Closing Date, to freely engage in any line of business or with any Person anywhere in the world;

(vi) Contracts relating to the distribution, marketing, advertising or sales of the Software Products, including Contracts with sales representatives or agents;

(vii) Contracts pursuant to which Seller subcontracts work to third-parties;

(viii) power of attorney;

(ix) Contracts relating to the acquisition or sale of any portion of the Subject Business or the Software Products;

(x) any employment Contract or severance agreement with any Hired Employee;

(xi) any Service Contract with an aggregate amount payable in excess of $10,000;

(xii) the Real Estate Lease; or

(xiii) other Contracts material to the Subject Business.

(b) Seller has made available to Buyer complete and correct copies of each Purchased Contract, together with all amendments, waivers and other changes thereto, and a complete and correct description of all material terms of all oral Purchased Contracts. No Purchased Contract has been canceled or, to Seller’s Knowledge, breached by the other party, and Seller has no Knowledge of any planned breach by any other party to any Purchased Contract. Since December 31, 2008, to Seller’s Knowledge, except as set forth on Schedule 3.11(b) , no customer, supplier or distributor of the Subject Business has indicated in writing or orally to Seller that it intends to stop or materially decrease the rate of business done with Seller or that it desires to renegotiate its Contract with Seller or that it would not do business with Buyer. Seller has performed all obligations required to be performed by it in connection with the Purchased Contracts and is not in default under or in breach of any Purchased Contract, and no event or condition has occurred or arisen which with the passage of time or the giving of notice or both would result in a default or breach thereunder. Each Purchased Contract is legal, valid, binding, enforceable subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general principles of equity and in full force and effect and, subject to Section 2.12 , will continue as such following the consummation of the transactions contemplated hereby.

(c) All Software Products have been sold pursuant to Seller’s standard End User License Agreement in the form attached to Schedule 3.11(c) , with no material modification to the terms thereof, including terms relating to Seller’s right to assign such End User License Agreement.

(d) To Seller’s Knowledge, there is no reason to believe that Buyer will be unable (i) to obtain, on monetary terms consistent with those currently in effect with Seller, a written maintenance agreement with any customer of the Subject Business who is not currently a party to a written Service Contract, and (ii) to the extent necessary, to obtain, without the payment or provision by Buyer of any sums or inducements, written consents to any transfer of the customer relationship as contemplated hereby.

(e) Schedule 3.11(e) sets forth a complete and correct list of each Purchased Contract that requires a consent or other action by any Person as a result of the execution, delivery and performance of this Agreement.

3.12 Seller Intellectual Property Assets

(a) Schedule 3.12(a) contains a complete and correct list of all material Seller Intellectual Property Assets, including a list of all (i) registered or applied for Patents, registered and material unregistered Trademarks and registered and material unregistered Copyrights, (ii) licenses, sublicenses or other agreements under which Seller is granted rights by others in Seller Intellectual Property Assets (“ Licenses In ”) (other than commercial off-the-shelf software that is made generally available for a total cost of less than $5,000), and (iii) licenses, sublicenses or

other agreements under which Seller has granted rights to others in Seller Intellectual Property Assets (“ Licenses Out ”), all of which have been made available for review by the Buyer prior to the date hereof. Except as set forth on Schedule 3.12(a) , all Licenses Out have been made on the terms and conditions of Seller’s End User License Agreement.

(b) Seller exclusively owns the Seller Intellectual Property Assets free and clear of all Liens, claims, encumbrances or licenses, or has the valid right to use the Seller Intellectual Property Assets pursuant to the Licenses In set forth in Schedule 3.12(a) .

(c) All Seller Intellectual Property Assets are valid and enforceable. All Seller Intellectual Property Assets owned by Seller that have been issued by, or registered, or are the subject of an application filed with, as applicable, the U.S. Patent and Trademark Office, the U.S. Copyright Office or any similar office or agency anywhere in the world, are currently in compliance with formal legal requirements (including, as applicable, payment of filing, examination and maintenance fees, inventor declarations, proofs of working or use, timely post-registration filing of affidavits of use and incontestability, and renewal applications).

(d) No Seller Intellectual Property Assets owned by Seller that have been issued by, or registered or the subject of an application filed with, as applicable, the U.S. Patent and Trademark Office, the U.S. Copyright Office or in any similar office or agency anywhere in the world is subject to any maintenance fees or taxes or actions falling due within ninety (90) days after the Closing Date.

(e) To the Knowledge of Seller, there are no pending or, threatened claims against Seller or any of its employees alleging that any of the operation of the Subject Business or any activity by Seller, or use of any Intellectual Property Asset or Software Product infringes or violates (or in the past infringed or violated) the rights of others in or to any Intellectual Property Asset (“ Third-Party Intellectual Property Assets ”) or constitutes a misappropriation of (or in the past constituted a misappropriation of) any subject matter of any Intellectual Property Assets of any Person or entity or that any of Seller Intellectual Property Assets is invalid or unenforceable.

(f) Neither the Seller Intellectual Property Assets, nor the operation of the Subject Business, nor any activity by Seller, nor manufacture, use, importation, offer for sale and/or sale of any Software Product (i) infringes or violates (or in the past infringed or violated) any third-party Copyright or (ii) constitutes a misappropriation of (or in the past constituted a misappropriation of) any subject matter of any third-party Trade Secret; or (iii) to the Knowledge of Seller, infringes or violates any third-party Patent.

(g) All former and current employees, consultants and contractors of Seller involved in the development of any Software Product or other Seller Intellectual Property Assets purported to be owned by Seller have executed written instruments with Seller that assign to Seller all rights, title and interest in and to any and all Intellectual Property Assets relating thereto possessed by such employees, consultants or contractors during the tenure of their employment or contract with Seller, except as may have been specifically identified in writing and disclaimed in such agreements.

(h) To the Knowledge of Seller, No third party is infringing upon or otherwise materially violating any rights in any Seller Intellectual Property Assets or any Seller’s Licenses In.

(i) Seller has taken reasonable security measures to protect the secrecy, confidentiality and value of all Trade Secrets that are part of the Seller Intellectual Property Assets, including requiring each Seller employee and consultant and any other Person with access to such Trade Secrets to execute a binding confidentiality agreement, correct and complete copies of which have been made available for review by the Buyer. To the Knowledge of Seller, there has not been any breach by any party of such confidentiality agreements.

(j) Neither Seller’s entry into this Agreement nor the performance of its obligations contemplated hereby shall (1) cause the forfeiture or termination of, or give rise to a right of forfeiture or termination of, any License In, (2) materially impair the right to Use any Seller Intellectual Property Asset or portion thereof as currently Used in the conduct of the Subject Business, or (3) cause any royalties fees or other payments to become payable to any third person as a result of the Use of any Seller Intellectual Property Asset which would not have been due and payable had the transaction not occurred or cause any existing obligations to pay such royalties, fees or other payments to increase, where such increase would not have been due had the transaction not occurred.

(k) Schedule 3.12(k) contains a complete and correct list of all Contracts expressly granting any third party rights to any Seller Intellectual Property Assets.

(l) No event has occurred, and no circumstance or condition exists, that has resulted in or would reasonably be expected to result in the release by Seller or any escrow agent to any third party of any Source Code.

(m) Schedule 3.12(m) contains a complete and correct list of Contracts with any Governmental Authority, pursuant to which Source Code, computer software programs or applications owned or co-owned by Seller were developed or co-developed and licensed and/or assigned to Seller.

(n) Seller is in compliance with all material obligations pursuant to any License In.

3.13 Litigation; Proceedings

Except as set forth on Schedule 3.13 , there are no actions, suits, proceedings, orders, judgments, decrees or investigations pending or, to Seller’s Knowledge, threatened against or affecting the Subject Business or any Purchased Asset at law or in equity, or before or by any Governmental Authority and to the Knowledge of Seller there is no basis known for any of the foregoing. Neither the Subject Business nor any Purchased Asset is subject to any arbitration proceedings under collective bargaining agreements or otherwise or, to Seller’s Knowledge, any governmental investigations or inquiries; and, to Seller’s Knowledge, there is no valid basis for any of the foregoing. Neither the Subject Business nor any of the Purchased Assets are subject to any outstanding order, judgment or decree issued by any Governmental Authority.

3.14 Governmental Permits

Schedule 3.14 sets forth a complete and correct list of all Governmental Permits owned, held or used by Seller or a Subsidiary in connection with the Subject Business. Seller owns or possesses all right, title and interest in and to all Governmental Permits or other similar rights which are necessary to conduct the Subject Business as presently conducted. Seller is in compliance with the terms and conditions of all Governmental Permits. No loss or expiration of any Governmental Permit is pending or, to Seller’s Knowledge, threatened (including as a result of the transactions contemplated hereby). The consummation of the transactions contemplated by this Agreement will not require any consent, renewal or notice with respect to any Governmental Permit.

3.15 Employees

(a) Schedule 3.15 contains a complete and correct list of all Hired Employees, describing for each such employee the position or title, whether classified as exempt or non-exempt for wage and hour purposes and, if exempt, the type of exemption relied upon, annual base salary, whether paid on a salary, hourly or commission basis and the average scheduled hours per week, bonus potential, date of hire, business location, status (i.e., active or inactive and, if inactive, the type of leave and estimated duration) and the total amount of bonus, severance and other amounts to be paid to such employee at the Closing or otherwise in connection with the transactions contemplated hereby. To the Knowledge of Seller, no Hired Employee has expressed any plans to terminate his or her employment or service arrangement with Seller.

(b) None of the Hired Employees are represented by any union or subject to any collective bargaining agreement and no such employees have engaged in any such organizational activities. Seller has experienced no labor trouble and no Hired Employee has brought or asserted any claim of unfair labor practices involving Seller.

(c) No representative of Seller has made any representation, promise or guarantee, express or implied, to any of its employees regarding (i) whether Buyer intends to retain or offer to retain such individual, or (ii) the terms and conditions on which Buyer may retain or offer to retain such individual.

(d) Seller has either paid in full all expense reimbursement claims of all Hired Employees as of the date hereof or obtained releases from all Hired Employees with respect to any claims therefor.

3.16 Insurance

The Purchased Assets are insured to the extent disclosed on Schedule 3.16 and all other material insurance policies and arrangements of Seller are disclosed in said Schedule. Seller’s worker’s compensation insurance complies with applicable statutory requirements as to the amount of such coverage. Schedule 3.16 sets forth, with respect to the Subject Business, a list of all pending claims and the claims history for Seller and its Subsidiaries during the current year and the preceding three (3) years (including with respect to insurance obtained but not currently maintained).

3.17 Affiliate Transactions

None of the Purchased Contracts are between Seller and any officer, director, stockholder, family member or Affiliate of any such Person (“ Interested Person ”). No Interested Person has any material direct or indirect interest in any entity that does business with Seller relating to the Subject Business or has any direct or indirect interest in any Purchased Asset or in any property, asset or right that is used in the conduct of the Subject Business.

3.18 Compliance with Laws

Neither Seller nor any of its Affiliates has received notice regarding any violation of, conflict with or failure to conduct the subject Business in compliance with any Applicable Law. To Seller’s Knowledge, no investigation or review of Seller or the Subject Business by any Governmental Authority is pending or threatened.

3.19 Governmental Authorities and Consents

Seller is not required to submit any notice, report or other filing with any Governmental Authority in connection with the execution or delivery by it of this Agreement and the other Transaction Documents to which it is a party or the consummation of the transactions contemplated hereby or thereby, except such filings and notices as may be required under applicable securities laws. Except as set forth on Schedule 3.19 , no consent, approval or authorization of any Governmental Authority is required to be obtained by Seller in connection with its execution, delivery and performance of this Agreement, the Warrant or the other Transaction Documents to which it is a party or the transactions contemplated hereby or thereby.

3.20 Product Warranties

Each Software Product sold, licensed or delivered by Seller has conformed with and satisfied all applicable contractual commitments that were scheduled or required to be performed prior to the Closing Date and all applicable express warranties as of the Closing Date. Except for Ordinary Course express warranty claims under the Purchased Contracts and Ordinary Course obligation to provide maintenance under maintenance agreements constituting a portion of the Purchased Contracts, Seller does not have any Liability or obligation (and, to Seller’s Knowledge, there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Seller giving rise to any Liability or obligation) for replacement, modification or repair of any Software Products or other damages in connection therewith. No Software Product is subject to any guaranty, warranty, or other indemnity other than expressly set forth under the Purchased Contracts.

3.21 Environmental Matters . The operations of the Subject Business are, and at all times have been, in material compliance with all applicable Environmental Laws, including possession of and compliance with the terms of all Governmental Permits required by Environmental Laws. There are no pending or, to the Knowledge of Seller, threatened, suits, actions, investigations or proceedings under or pursuant to Environmental Laws against Seller or involving any real property currently or, to the Knowledge of Seller, formerly owned, operated or leased or other sites at which Hazardous Materials were disposed of, or allegedly disposed of, by Seller. To Seller’s Knowledge, Seller has received no written allegations of any Liabilities

under any Environment Law, Seller has no Knowledge of any pending or threatened such allegations, and Seller has not generated, transported, treated, stored, installed, disposed of or released any Hazardous Materials in violation of, or in a manner that would reasonably be expected to give rise to liability to Seller under, any Environmental Laws.

3.22 Broker’s Fees

No broker, investment banker, financial advisor or other Person, other than Kaufman Bros., L.P., whose fees and expenses shall be paid by Seller, is entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller. Seller has received the opinion of its financial advisor, Kaufman Bros., L.P., to the effect that, as of such date and based on and subject to the matters set forth in the opinion, the Purchase Price is fair, from a financial point of view, to Seller.

3.23 Disclosure

None of this Agreement, the Warrant or the other Transaction Documents to which Seller is a party contains any untrue statement of a material fact or omits a material fact necessary to make each statement contained herein or therein, not misleading in light of the circumstances in which they were made.

NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH OF THE PARTIES HERETO THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE III, SELLER DOES NOT MAKE ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY, WITH RESPECT TO ITSELF, THE SUBJECT BUSINESS, THE PURCHASED ASSETS OR THE ASSUMED LIABILITIES TRANSFERRED TO BUYER PURSUANT TO THE TERMS OF THIS AGREEMENT, AND SELLER EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTIES, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, CONDITION OR FITNESS FOR A PARTICULAR PURPOSE OR ORDINARY PURPOSE, OR ANY REPRESENTATION OR WARRANTY AS TO VALUE.

3.24 Accounts Receivable . All outstanding accounts and notes receivable with respect to the Subject Business reflected on the Financial Statements are, and in the Final Net Amount of the Working Capital Assets will be, due and valid claims against account debtors for goods or services delivered or rendered subject to no defenses, offsets or counterclaims, except as reserved against on the Financial Statements or the Final Net Amount of the Working Capital Assets, as the case may be. All such receivables arose in the Ordinary Course of business. No such receivables are subject to prior assignment, claim, lien or security interest. Seller has not incurred any liabilities to customers for discounts, returns, promotional allowances or otherwise, except to the extent of the reserves therefor reflected on the Financial Statements or the Final Net Amount of the Working Capital Assets. Neither Seller nor any Subsidiary has any liability for any refunds, allowances or returns in respect of products manufactured, processed, distributed, shipped or sold by or for the account of Seller or any Subsidiary on or prior to the Closing Date, except to the extent of the reserves therefor reflected on the Financial Statement or the Final Net

Amount of the Working Capital Assets. Schedule 3.24 contains a complete and correct list of the names and addresses of all banks and financial institutions in which Seller has an account, lock box or other arrangement for the collection of accounts receivable with the names of all persons authorized to draw thereon or with access thereto.

3.25 Software and Information Systems .

(a) Schedule 3.25(a) sets forth a complete and correct list of all (i) material Software that is owned by Seller and used or distributed in the operation of the Subject Business (the “ Seller Software ”); (ii) Software that is licensed to Seller and used in the operation of the Subject Business, the licensor of such Software, (iii) the Software Products, and (iv) any material pending Software development projects currently in planning by the Subject Business, together with a description of such projects and the stage of their development.

(b) Except as set forth in Schedule 3.25(b) , (i) the Seller Software is not subject to any transfer, assignment, source code escrow agreement, or license reversion,; (ii) Seller has not granted any other current future or conditional rights, licenses or interests in or to the Source Code used or included in any Software Product; (iii) Seller has not provided or disclosed the Source Code of any Software Product to any Person or entity, except where such Source Code is, by its nature, not normally obfuscated or compiled prior to the distribution of the Software Product; (iv) Seller has maintained and protected the Seller Software with appropriate proprietary notices (including notice of ownership), confidentiality and non-disclosure agreements and such other measures as are normally used in the industry; (v) the Software is protectable under applicable copyright law and has not been forfeited to the public domain and has been registered with the United States Copyright Office or is eligible for registration.

(c) Seller’s rights in the Seller Software are free and clear of any liens, encumbrances, restrictions, or legal or equitable claims of others and there are no agreements or arrangements in effect with respect to the marketing, distribution, licensing, sale, resale or promotion of the Software between Seller and any other person.

(d) Seller has received no notice of any violation of patent, trade secret rights, copyrights or other proprietary rights with respect to any Seller Software and knows of no basis therefor.

(e) Seller has taken commercially reasonably steps to assure that the Software contains no timer, virus, copy protection device, disabling code, clock, counter or other limiting design or routine that causes the Software (or any operation thereof) or become erased, inoperable, impaired, or otherwise incapable of being used in the full manner for which it was contemplated for use.

(f) Except as set forth in Schedule 3.25 , none of the Software Products contain or are derived from any Public Software. Except as set forth in Schedule 3.25 , none of the Software Products contain any third-party software.

(g) The incorporation, linking, calling or other use in or by any such Software Product of any third-party software does not obligate Seller to disclose, make available, offer or deliver any portion of the source code of any Software Product or component thereof to any

third-party. To Seller’s Knowledge, no third party has any claim to the Source Code by virtue of the incorporation, linking, calling or other use in or by any such Software Product of any third-party Software.

(h) Seller has not collected or used any personally identifiable information in violation of any applicable statute or regulation in any United States jurisdiction or in violation of its privacy policy (if any) relating to the collection, storage, use and onward transfer of all personally identifiable information.

(i) Seller holds all material product (including Software Product) registrations, accreditations and other certifications required for the conduct of the Subject Business (all of such registrations, accreditations and certifications being referred to herein as “ Product Certifications ”). Seller is in compliance in all material respects with the terms and conditions of all such Product Certifications and, to Seller’s Knowledge, no written notices have been received by Seller since January 1, 2008, alleging the failure to hold any Product Certification. To Seller’s Knowledge, there is no reasonable basis for any present or future action rescinding any such Product Certifications and no loss or expiration of any such Product Certifications is reasonably foreseeable or has had or would reasonably be expected to have a Material Adverse Effect. All of the Product Certifications are transferable to Buyer and will be transferred by Seller to Buyer on the Closing Date.

(j) As used by Seller in the Business, the Software Product comply with all applicable requirements relating to the export or re-export to those countries in which the Subject Business currently sells the Software Products.

(k) Copies of all Seller Software and copies of all licenses and other agreements which are maintained by Seller with respect to Software, Source Code or Software Products shall be delivered to Buyer at or prior to Closing.

(l) To Seller’s Knowledge, the Software Products perform as Seller has warranted to its customers and substantially in accordance with the Software Products’ documented specifications.

3.26 Customers and Suppliers . All sales contracts and orders with customers and suppliers were entered into by or on behalf of Seller in the Ordinary Course of business. Schedule 3.26 sets forth an accurate and complete list of the 25 largest customers of the Business, determined on the basis of revenues from items sold for each of the fiscal years ended December 31, 2007 and 2008 and the six-month period ended June 30, 2009. To the Knowledge of Seller, no customer or supplier will cease to do business with Buyer after, or as a result of, the consummation of any transactions contemplated hereby. Seller has no Knowledge of any fact, condition or event (other than possible terminations in the Ordinary Course of business) which would adversely affect its relationship with any customer or supplier. Since December 31, 2008, there has been no cancellation of backlogged orders in excess of the average rate of cancellation prior to such date.

Neither Seller, nor any of its officers or employees, has, directly or indirectly, given or agreed to give any rebate, gift or similar benefit to any supplier, customer, distributor, broker,

governmental employee or other person, who was, is or may be in a position to help or hinder the business (or assist in connection with any actual or proposed transaction) which could reasonably be expected to subject Seller or Buyer to any damage or penalty in any civil, criminal or governmental litigation or proceeding or which would have a Material Adverse Effect on the Business.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BUYER

As a material inducement to Seller to enter into this Agreement, subject to the exceptions and limitations set forth in this Article IV and the matters set forth on the Schedules, Buyer hereby represents and warrants to Seller that:

4.1 Organization and Good Standing

Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority and all licenses, permits and authorization necessary to own and operate its business. Buyer is duly qualified in each jurisdiction in which the ownership of property or the conduct of its business requires such qualification, except where the failure to do so would not, individually or in the aggregate, have a material adverse effect on the business, assets, operations or financial condition of Buyer that adversely affects Buyer’s ability to consummate the transactions contemplated by this Agreement.

4.2 Corporate Authorization

Buyer has full corporate power and authority to execute and deliver this Agreement, the Buyer Note and each of the other Transaction Documents to which it is a party, to consummate the transactions contemplated hereunder and thereunder and to perform each of its obligations hereunder and thereunder. The board of directors of Buyer has duly approved this Agreement, the Buyer Note and all other Transaction Documents to which it is a party and has duly authorized the execution and delivery of this Agreement, the Buyer Note and all other Transaction Documents to which it is a party and the consummation of the transactions contemplated hereby and thereby. No other corporate proceedings on the part of Buyer (including, without limitation, approval of Buyer’s stockholders) are necessary to approve and authorize the execution and delivery of this Agreement, the Buyer Note and the other Transaction Documents to which Buyer is a party and the consummation of the transactions contemplated hereby and thereby. This Agreement, the Buyer Note and all other Transaction Documents to which Buyer is a party have been duly executed and delivered by Buyer and constitute the valid and binding agreements of Buyer, enforceable against Buyer in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general principles of equity.

4.3 No Breach

The execution, delivery and performance by Buyer of this Agreement, the Buyer Note and all other Transaction Documents to which it is a party and the consummation by Buyer of the transactions contemplated hereby and thereby do not and will not (a) conflict with or result in any breach of any of the terms, conditions or provisions of, (b) constitute a default under, (c) result in a violation of, (d) give any third-party the right to modify, terminate or accelerate or cause the modification, termination or acceleration of, any obligation under, (e) result in the creation of any Lien upon any of the assets of Buyer, or (f) require any authorization, consent, approval, exemption or other action by, or notice or declaration to or filing with, any third-parties, including any court or administrative or other governmental body or agency, under (i) the provisions of the certificate of incorporation or bylaws of Buyer, (ii) any law, statute, rule or regulation to which Buyer is subject, (iii) any judgment, order or decree to which Buyer is subject, or (iv) any other contract, license, instrument or agreement to which Buyer is a party or to which it is subject.

4.4 Financial Information . Buyer has delivered to Seller (a) the unaudited, consolidated balance sheet of Parent and its Subsidiaries as at December 31, 2007 and 2008, and the unaudited, consolidated statements of cash flows, income and stockholders’ equity for the fiscal years then ended and (b) the unaudited, consolidated balance sheet of Parent and its Subsidiaries as at June 30, 2009 and the unaudited, consolidated statements of cash flows, income and stockholders’ equity of Parent and its Subsidiaries for the six-month period then ended (collectively, the “ Parent Financial Statements ”). Buyer has also delivered to Seller (a) the unaudited, consolidated balance sheet of SilkRoad as at December 31, 2007 and 2008, and the unaudited, consolidated statements of cash flows, income and stockholders’ equity for the fiscal years then ended and (b) the unaudited, consolidated balance sheet of SilkRoad as at June 30, 2009 and the unaudited, consolidated statements of cash flows, income and stockholders’ equity of SilkRoad for the six-month period then ended (collectively, the “ SilkRoad Financial Statements ,” and together with the Parent Financial Statements, the “ Guarantor Financial Statements ”). The Guarantor Financial Statements and the notes thereto, if any, (i) are complete and accurate in all material respects and fairly present the financial condition of each respective Guarantor (and, in the case of Parent, its Subsidiaries) at the respective dates thereof and the results of operations for the periods then ended, and (ii) were prepared in accordance with the books and records of each respective Guarantor (and, in the case of Parent, its Subsidiaries) in conformity with GAAP, except for the omission of footnotes and normal year-end adjustments which are not, individually and in the aggregate, material. None of the Guarantor Financial Statements contains any material, non-recurring items, except as expressly set forth therein.

4.5 Litigation; Proceedings

There are no actions, suits, proceedings, orders, judgments, decrees or investigations pending or, to Buyer’s knowledge, threatened against or affecting Buyer at law or in equity, or before or by any Governmental Authority and to the knowledge of Buyer there is no basis known for any of the foregoing. Buyer is not subject to any arbitration proceedings under collective bargaining agreements or otherwise or, to Buyer’s knowledge, any governmental investigations or inquiries; and, to Buyer’s knowledge, there is no valid basis for any of the foregoing. The

Buyer is not subject to any outstanding order, judgment or decree issued by any Governmental Authority.

4.6 Availability of Funds

Buyer has sufficient cash available to enable it to consummate the transactions contemplated by this Agreement (including performing its obligations under the Buyer Note), to operate the Subject Business for the reasonably foreseeable future, to satisfy the Assumed Liabilities and to meet the financial obligations under the Purchased Contracts that Buyer is assuming as such obligations are presently known or reasonably anticipated.

4.7 Broker’s Fees

Any liability or obligation on the part of the Buyer to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement shall be paid by Buyer.

4.8 Disclosure

None of this Agreement, the Buyer Note or the other Transaction Documents to which Buyer is a party contains any untrue statement of a material fact or omits a material fact necessary to make each statement contained herein or therein, not misleading in light of the circumstances in which they were made.

4.9 Inspections; No Other Representations

Buyer is an informed and sophisticated purchaser experienced in the evaluation and purchase of assets such as the Subject Business. Buyer has undertaken such investigation and has been provided with and has evaluated such documents and information as it has deemed necessary to enable it to make an informed and intelligent decision with respect to the execution, delivery and performance of this Agreement. Buyer agrees, subject to the express terms hereof, to accept the Purchased Assets and assume the Assumed Liabilities in the condition they are in on the Closing Date based upon its own inspection, examination and determination with respect thereto as to all matters and without reliance upon any express or implied representations or warranties of any nature made by or on behalf of or imputed to Seller, other than those expressly set forth in this Agreement. Without limiting the generality of the foregoing, except as expressly set forth in this Agreement, Buyer acknowledges that Seller makes no representation or warranty with respect to any projections, estimates or budgets delivered to or made available to Buyer of future revenues, future results of operations (or any component thereof), future cash flows or future financial condition (or any component thereof) of the Business or Purchased Assets or the future business and operations thereof or any other information or documents made available to Buyer or its counsel, accountants or advisors with respect to the Business or the Purchased Assets or the businesses or operations thereof.

ARTICLE V

COVENANTS

5.1 Conduct of Business

Seller agrees that, between the date hereof and the Closing, except as set forth in Schedule 5.1 or as expressly provided by any other provision of this Agreement, or unless Buyer shall otherwise agree in advance in writing (which agreement shall not be unreasonably withheld, delayed or conditioned), Seller shall, and shall cause each of its Subsidiaries to, (i) conduct its operations in all material respects only in the Ordinary Course of the Subject Business, (ii) pay or perform the Liabilities of the Subject Business when due, (iii) use its reasonable best efforts to keep available the services of the key employees and key consultants of Seller and each of its Subsidiaries and to preserve the current relationships with customers, suppliers and other Persons as are reasonably necessary in order to preserve substantially intact the Subject Business. In addition, without limiting the foregoing, except (x) as set forth in Schedule 5.1 , or (y) as expressly provided by any other provision of this Agreement, Seller shall not and shall not permit any of its Subsidiaries, nor any of its or its Subsidiaries’ officers, directors or employees, Affiliates or any investment banker, financial advisor, attorney, accountant or other representative retained by it or any of its respective Subsidiaries, to (unless required by Applicable Law), between the date of this Agreement and the Closing, directly or indirectly, do, or agree to do, any of the following without the prior written consent of the Buyer (which consent shall not be unreasonably withheld, delayed or conditioned):

(a) sell, pledge, dispose of, transfer, lease, license, or encumber, or authorize the sale, pledge, disposition, transfer, lease, license, or encumbrance of, any of the Purchased Assets, except in the Ordinary Course of business;

(b) enter into any agreement with respect to the voting of the capital stock of Seller;

(d) modify, amend or terminate, or waive, release or assign any material rights or claims with respect to any confidentiality or standstill agreement to which Seller is a party and which relates to a business combination involving the Subject Business;

(e) take any action that is intended to result in any of the conditions to the transactions contemplated hereby set forth in Sections 6.1 and 6.2 not being satisfied;

(f) take any action that is reasonably likely to cause a delay in the convening of the Seller Stockholder Meeting; or

(g) authorize or enter into any agreement or otherwise make any commitment to do any of the foregoing.

5.2 No Solicitation

(a) Alternative Transaction . Seller shall not and shall not permit any of its Subsidiaries to, nor authorize or permit any of its or its Subsidiaries’ officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative retained by it or any of its respective Subsidiaries to, directly, or indirectly, (i) solicit, initiate or encourage, or take any other action to knowingly facilitate, induce or encourage any inquiries with respect to, or the making, submission or announcement of, any Alternative Transaction Proposal, (ii) participate in any discussions or negotiations regarding, furnish to any Person any information with respect to, or otherwise cooperate in any way with or knowingly facilitate any effort or attempt to make or implement any Alternative Transaction Proposal (except to disclose the existence of this Agreement and the terms hereof or as specifically permitted by Section 5.2(c) ), (iii) approve, endorse or recommend any Alternative Transaction (except as specifically permitted by Section 5.2(d) ), or (iv) enter into any letter of intent or similar document or any contract, agreement or commitment (whether binding or not) contemplating or otherwise relating to any Alternative Transaction Proposal (except a confidentiality agreement contemplated by Section 5.2(c)(i) ). Seller will immediately cease, and will cause its officers, directors and employees and instruct any investment banker, financial adviser, attorney, accountant or other representative retained by it to cease, any and all existing activities, discussions or negotiations with any third parties conducted heretofore with respect to any Alternative Transaction Proposal, and will use its commercially reasonable efforts to enforce, and will not waive any provisions of, any confidentiality or standstill agreement (or any similar agreement) to which Seller is a party relating to an Alternative Transaction Proposal.

(b) Notification . As promptly as practicable (and in any event within twenty-four (24) hours) after receipt of any Alternative Transaction Proposal or any request for nonpublic information or any inquiry relating in any way to any Alternative Transaction Proposal, the Seller shall provide Buyer with oral and written notice of the material terms and conditions of Alternative Transaction Proposal, request or inquiry, and the identity of the Person or group making any such Alternative Transaction Proposal, request or inquiry and a copy of all written materials provided to it in connection with such Alternative Transaction Proposal, request or inquiry. In addition, Seller shall provide Buyer as promptly as possible with all information as is reasonably necessary to keep the Buyer informed in all material respects of all oral or written communications regarding, and the status and material terms of, any Alternative Transaction Proposal, request or inquiry, and, without limitation of the other provisions of this Section 5.2 , shall promptly provide to Buyer a copy of all written materials (including written materials provided by email or otherwise in electronic format) subsequently provided by or to Seller in connection with any Alternative Transaction Proposal, request or inquiry.

(c) Superior Proposal . Notwithstanding anything to the contrary contained in Section 5.2(a) , in the event of an unsolicited, bona fide written Alternative Transaction Proposal which Seller determines to be, or to be reasonably likely to result in, a Superior Proposal, the Seller may then take the following actions (but only if and to the extent that (x) its Board of Directors concludes in good faith, after consultation with its outside legal counsel, that the failure to do so would be inconsistent with its fiduciary duties under Applicable Law, (y) the Seller has given the Buyer at least two Business Days prior written notice of its intention to take any of the following actions and of the identity of the Person or group making such Alternative Transaction

Proposal and the material terms and conditions of the Alternative Transaction Proposal, and (z) Seller shall not have breached in any material respect any of the provisions of this Section 5.2 ):

(i) Furnish nonpublic information to the Person or group making such Alternative Transaction Proposal; provided , however , that (A) prior to furnishing any nonpublic information, it receives from such Person or group an executed confidentiality agreement containing terms at least as restrictive as the terms contained in the Confidentiality Agreement, dated as of [ ], between the Buyer and Seller (the “ Confidentiality Agreement ”) and (B) contemporaneously with furnishing any nonpublic information to such Person or group, it furnishes such nonpublic information to Buyer (to the extent such nonpublic information has not been previously so furnished to Buyer); and

(ii) Engage in discussions or negotiations with such Person or group with respect to Alternative Transaction Proposal.

(d) Changes of Recommendation . Solely in response to the receipt of an unsolicited, bona fide written Alternative Transaction Proposal which is determined to be a Superior Proposal, the Board of Directors of the Seller may make a Change of Recommendation, if all of the following conditions in clauses (i) through (v) are met:

(i) the Superior Proposal has been made and has not been withdrawn and continues to be a Superior Proposal;

(ii) the stockholder vote at the Seller Stockholders’ Meeting has not occurred;

(iii) the Seller has (A) provided to Buyer three (3) Business Days’ prior written notice which shall state expressly (i) that it has received a Superior Proposal, (ii) the material terms and conditions of the Superior Proposal and the identity of the Person or group of Persons making the Superior Proposal, and (iii) that Seller intends to effect a Change of Recommendation and the manner in which it intends to do so, and (B) during the aforementioned period, if requested by Buyer, engaged in good faith negotiations to amend this Agreement in such a manner that the Alternative Transaction Proposal which was determined to be a Superior Proposal no longer is a Superior Proposal;

(iv) the Board of Directors of the Seller has determined in good faith, after consultation with its outside legal counsel, that, in light of such Superior Proposal, the failure of the Board of Directors to effect a Change of Recommendation would be inconsistent with its fiduciary duties under Applicable Law; and

(v) the Seller shall have complied in all material respects with Section 5.2(c) and shall not have breached in any material respect any of the other provisions set forth in this Section 5.2 .

(e) Tender Offer Rules . Nothing contained in this Agreement shall prohibit the Seller or its Board of Directors from taking and disclosing to their stockholders a position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act; provided , however , that Seller shall not effect, or disclose pursuant to such rules or otherwise a position

which constitutes, a Change of Recommendation unless specifically permitted pursuant to the terms of Section 5.2(d) .

5.3 Preparation of Proxy Statement; Seller Stockholders’ Meeting

(a) Proxy Statement . As soon as reasonably practicable following the Date hereof, Seller, with cooperation by the Buyer, shall prepare and file with the SEC the Proxy Statement. Seller shall use its commercially reasonable efforts to respond to any comments of the SEC and to cause the Proxy Statement to be mailed to its stockholders as promptly as practicable after the Proxy Statement is filed with the SEC, subject to compliance with the Exchange Act, including Rule 14a-6 promulgated thereunder. Seller shall also take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified or filing a general consent to service of process) required to be taken under any applicable state securities laws in connection with the issuance and reservation of shares of Seller Common Stock pursuant to the Warrant, and the Buyer shall furnish all information concerning the Buyer as may be reasonably requested in connection with any such action. If at any time prior to the Closing any information (including any Change of Recommendation) relating to Seller or the Buyer, or any of their respective Affiliates, officers or directors, should be discovered by Seller or the Buyer which should be set forth in an amendment or supplement to the Proxy Statement, so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, the party which discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and, to the extent required by law, disseminated to the stockholders of Seller.

(b) Stockholders’ Meeting . The Seller shall, as promptly as practicable after the Proxy Statement is filed with the SEC, subject to compliance with the Exchange Act, including Rule 14a-6 promulgated thereunder, take all action necessary in accordance with Applicable Law and the Seller Charter Documents, to duly give notice of, convene and hold the Seller Stockholders’ Meeting. Subject to Section 5.2(d) , the Seller will use commercially reasonable efforts to solicit from its stockholders proxies in favor of the approval of the transactions contemplated by this Agreement, and will take all other action necessary or advisable to secure the vote or consent of its stockholders required by Applicable Law to obtain such approvals. Notwithstanding anything to the contrary contained in this Agreement, the Seller may adjourn or postpone the Seller Stockholders’ Meeting to the extent necessary to ensure that any necessary supplement or amendment to the Proxy Statement is provided to its stockholders in advance of a vote on and the approval of the transactions contemplated by this Agreement, or, if, as of the time for which the Seller Stockholders’ Meeting is originally scheduled, there are insufficient shares of Seller Common Stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of such meeting. The Seller shall ensure that the Seller Stockholders’ Meeting is called, noticed, convened, held and conducted, and that all proxies solicited in connection with the Seller Stockholders’ Meeting are solicited in compliance with Applicable Law. Notwithstanding any Change of Recommendation by the Board of Directors of Seller, approval of the transactions contemplated by this Agreement shall be submitted to the Seller Stockholders at the Seller Stockholders’ Meeting, and nothing contained herein shall be deemed to relieve the Buyer or Seller of such obligations.

(c) Board Recommendations . Except to the extent expressly permitted by Section 5.2(d) : (i) the Board of Directors of the Seller shall recommend that its stockholders vote in favor of, the approval of the transactions contemplated by this Agreement at the Seller Stockholders’ Meeting, and (ii) the Proxy Statement shall include a statement to the effect that the Board of Directors of Seller has recommended that all holders of capital stock of Seller entitled to vote thereon vote in favor of approval of the transactions contemplated by this Agreement at the Seller Stockholders’ Meeting.

5.4 Access to Information; Confidentiality

(a) Access to Information . Subject to the Confidentiality Agreement and Applicable Law, Seller shall, and shall cause each of its Subsidiaries to, afford Buyer and its officers, employees, accountants, counsel, financial advisors and other representatives of such other party, reasonable access at all reasonable times on reasonable notice during the period prior to the Closing to all properties, books, contracts, commitments, personnel and records related to the Subject Business (provided, that such access shall not unreasonably interfere with the business or operations of Seller). During such period, Seller shall, and shall cause each of its Subsidiaries to, furnish promptly to the Buyer (i) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws and (ii) all other information concerning the Subject Business, its properties and personnel as Buyer may reasonably request. No review pursuant to this Section 5.4 shall affect or be deemed to modify any representation or warranty contained herein, the covenants or agreements of the parties hereto or the conditions to the obligations of the parties hereto under this Agreement.

(b) Confidentiality . Except as otherwise provided in this Agreement, Buyer will hold and keep confidential, and will cause its respective officers and employees and will direct its accountants, counsel, financial advisors and other representatives and Affiliates to hold and keep confidential, any nonpublic information in accordance with the terms of the Confidentiality Agreement, which Confidentiality Agreement will remain in full force and effect and shall survive termination of this Agreement as provided therein.

5.5 Reasonable Efforts

(a) Governmental and Third Party Approvals . Each of the parties agrees to use their commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable under Applicable Law to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including (1) the obtaining of all necessary actions or non-actions, waivers, consents and approvals from Governmental Authorities and the making of all necessary registrations and filings and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Authority, (2) the obtaining of all necessary consents, approvals or waivers from third parties, (3) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated by this Agreement, including promptly seeking to have any stay or temporary restraining order entered by any court or other Governmental

Authority vacated or reversed, and (4) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. Subject to Applicable Law relating to the exchange of information, the Buyer and Seller shall have the right to review in advance, and to the extent reasonably practicable each will consult the other on, all the information relating to the Buyer or Seller, as the case may be, that appears in any filing made with, or written materials submitted to, any Governmental Authority or third party in connection with the transactions contemplated by this Agreement.

(b) Notification . Each of the Buyer and Seller shall keep the other reasonably apprised of the status of matters relating to the completion of the transactions contemplated hereby and work cooperatively in connection with obtaining all required approvals or consents of any Governmental Authority. In that regard, each party shall without limitation use its commercially reasonable efforts to: (1) promptly notify the other of, and if in writing, furnish the other with copies of (or, in the case of material oral communications, advise the other orally of) any communications from or with any Governmental Authority (whether domestic, foreign or supranational) with respect to the other transactions contemplated by this Agreement, (2) permit the other to review and discuss in advance, and consider in good faith the views of the other in connection with, any proposed written (or any material proposed oral) communication with any such Governmental Authority with respect to the transactions contemplated by this Agreement, (3) to the extent practical, not participate in any meeting with any such Governmental Authority with respect to the transactions contemplated by this Agreement unless it consults with the other in advance and to the extent permitted by such Governmental Authority gives the other the opportunity to attend and participate thereat, and (4) furnish the other with such necessary information and reasonable assistance as the Buyer or Seller, as applicable, may reasonably request in connection with its preparation of necessary filings or submissions of information to any such Governmental Authority.

5.6 Notification . Seller shall give prompt notice to Buyer and Buyer shall give prompt notice to the Seller, as the case may be, if it determines that any change, event, circumstance or effect has had a Material Adverse Effect or would result in the failure of any of the conditions set forth in Article VI to be satisfied. Notwithstanding the above, the delivery of any notice pursuant to this Section 5.6 will not limit or otherwise affect the remedies available hereunder to the party receiving such notice or the conditions to such party’s obligation to consummate the transactions contemplated hereby.

5.7 Fees and Expenses . Except as set forth in this Section 5.7 , all fees and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such fees or expenses. For the avoidance of doubt, Seller shall bear the costs and expenses incurred in connection with the filing, printing and mailing of the Proxy Statement (including any SEC filing fees) and any preliminary materials related thereto.

ARTICLE VI

CONDITIONS TO CLOSING

6.1 Conditions to Each Party’s Obligation to Closing

(a) Stockholder Approval . The Seller Stockholder Approval shall have been obtained.

(b) No Injunctions or Restraints . No judgment, order, decree, statute, law, ordinance, rule or regulation, or other legal restraint or prohibition, entered, enacted, promulgated, enforced or issued by any court or other Governmental Authority of competent jurisdiction (collectively, “ Restraints ”), shall be in effect or be pending which prohibits, makes illegal or enjoins, or threatens to prohibit, make illegal or enjoin, the consummation of the transactions contemplated by this Agreement.

6.2 Conditions to Obligations of the Buyer

(a) Representations and Warranties . (i) The representations and warranties of Seller (except for the representations and warranties set forth in Article III ) set forth herein (A) that are qualified as to Material Adverse Effect shall be true and correct and (B) that are not so qualified as to Material Adverse Effect shall be true and correct, in each case both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except to the extent where the failure of any such representations and warranties referred to in clause (B) to be so true and correct does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on Seller or the Subject Business, and (ii) the representations and warranties of Seller set forth in Article III shall be true and correct in all material respects, in each case both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date).

(b) Performance of Obligations of Seller . Seller shall have performed, or complied with, in all material respects, all obligations required to be performed or complied with by it under this Agreement at or prior to the Closing Date.

(c) Officer’s Certificate . The Buyer shall have received an officer’s certificate duly executed by the Chief Executive Officer of Seller to the effect that the conditions set forth in Section 6.2(a) and Section 6.2(b) have been satisfied.

(d) Consents Obtained . The Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the consents, waivers, approvals, authorizations or orders required to be obtained, and all filings to be made, by Seller shall have been obtained and made by Seller.

(e) Material Adverse Change . Since the date hereof, there shall have been no change, occurrence or circumstance in the business, results of operations or financial condition

of Seller or the Subject Business having or reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Seller or the Subject Business.

(f) Other Deliveries . The Buyer shall have received such other certificates and instruments (including certificates of good standing of Seller in its jurisdiction of organization and the various foreign jurisdictions in which it is qualified, certified charter documents, certificates as to the incumbency of officers and the adoption of authorizing resolutions) as it shall reasonably request in connection with the Closing.

6.3 Conditions to Obligations of Seller

(a) Representations and Warranties . (i) The representations and warranties of the Buyer (except for the representations and warranties set forth in Article IV ) set forth herein (A) that are qualified as to Material Adverse Effect shall be true and correct and (B) that are not so qualified as to Material Adverse Effect shall be true and correct, in each case both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date), except to the extent where the failure of any such representations and warranties referred to in clause (B) to be so true and correct does not have, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Buyer, and (ii) the representations and warranties of the Buyer set forth in Article IV shall be true and correct in all material respects, in each case both when made and at and as of the Closing Date, as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such date).

(b) Performance of Obligations of the Buyer . The Buyer shall have performed, or complied with, in all material respects, all obligations required to be performed or complied with by it under this Agreement at or prior to the Closing Date.

(c) Compliance Certificate . Seller shall have received an officer’s certificate duly executed by the Chief Executive Officer of the Buyer to the effect that each of the condition set forth in Section 6.3(a) and Section 6.3(b) have been satisfied.

(d) Other Deliveries . Seller shall have received such other certificates and instruments (including certificates of good standing of Buyer in its jurisdiction of organization, certificates as to the incumbency of officers and the adoption of authorizing resolutions) as it shall reasonably request in connection with the Closing.

ARTICLE VII

Closing Deliveries

7.1 Seller’s Deliveries at Closing

At the Closing, Seller shall deliver to Buyer the following:

(a) The Warrant;

(b) The General Assignment;

(d) The Trademark Assignment;

(e) The Copyright Assignment;

(f) The Third Party IP Licensor Consent and Waiver;

(g) The Landlord Consent and Waiver;

(h) The Noncompetition Agreement;

(i) All material consents and approvals by third-parties to the assignment of the applicable Purchased Contracts, including those set forth on Schedule 3.19 , all on terms and conditions no less favorable to Seller than those in existence as of the date hereof;

(j) All material authorizations and approvals received and other Governmental Permits received in connection with the transfer of the Subject Business and the Purchased Assets to Buyer and the consummation of the transactions contemplated hereby;

(k) Releases of all Liens affecting or applicable to the Subject Business or any of the Purchased Assets;

(l) Possession of all of the Purchased Assets;

(m) Certified copies of the Certificate of Incorporation and By-laws of Seller and the resolutions of Seller’s board of directors authorizing the execution, delivery and performance of this Agreement, the Warrant and the other Transaction Documents and approving the consummation of the transactions contemplated hereby and thereby;

(n) Certificate of the Secretary of State of Delaware stating that Seller is in good standing; and

(o) Such other documents or instruments as Buyer may reasonably request to effect the transactions contemplated hereby.

7.2 Buyer’s Deliveries at Closing

At the Closing, Buyer shall deliver to Seller the following:

(a) The Closing Cash Payment as set forth in Section 2.4 hereof;

(b) The Buyer Note;

(d) The SilkRoad Guaranty;

(e) The General Assignment;

(f) Certified resolutions of Buyer’s board of directors authorizing the execution, delivery and performance of this Agreement, the Warrant and the other Transaction Documents and approving the consummation of the transactions contemplated hereby and thereby;

(g) The Landlord Consent and Waiver; and

(h) Such other documents or instruments as Seller may reasonably request to effect the transactions contemplated hereby.

ARTICLE VIII

TERMINATION, AMENDMENT AND WAIVER

8.1 Termination

(a) by mutual written consent of the Buyer and Seller, if the Board of Directors of each so determines;

(b) by written notice of either the Buyer or Seller (as authorized by the Board of Directors of the Buyer or Seller, as applicable):

(i) if the Closing shall not have been consummated by January 31, 2010 (the “ Outside Date ”); provided , however , that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to any party whose failure to comply with any provision of this Agreement has been the cause of, or resulted in, the failure of the transactions contemplated hereby to be consummated by such date; or

(ii) if a Governmental Authority of competent jurisdiction shall have issued an order, decree or ruling or taken any other action (including the failure to have taken an action), in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Closing, which order, decree, ruling or other action is final and nonappealable; provided , however , that the right to terminate this Agreement under this Section 8.1(b)(ii) shall not be available to any party whose failure to comply with any provision of this Agreement has been the cause of, or resulted in, such action;

(c) by the Buyer (as authorized by its Board of Directors) upon a material breach of any representation, warranty, covenant or agreement of Seller set forth in this Agreement, if such breach shall be incapable of being cured or shall not have been cured in all material respects within 20 Business Days after written notice thereof shall have been received by Seller;

(d) by Seller (as authorized by its Board of Directors) upon a material breach of any representation, warranty, covenant or agreement of the Buyer set forth in this Agreement, if such breach shall be incapable of being cured or shall not have been cured in all material respects within 20 Business Days after written notice thereof shall have been received by the Buyer;

(e) by the Buyer (as authorized by its Board of Directors), at any time prior to Seller Stockholder Approval, if Seller, the Seller Board of Directors or any committee thereof, for any reason, shall have (i) failed to include in the Proxy Statement distributed to the Seller Stockholders its recommendation in favor of approval of the transaction contemplated by this Agreement, (ii) effected a Change of Recommendation, or (iii) approved or recommended any Alternative Transaction; or

(f) by the Buyer, if the Seller Stockholder Approval shall not have been obtained at the Seller Stockholders’ Meeting, or at any adjournment or postponement thereof on or prior to the Outside Date.

8.2 Effect of Termination . In the event of termination of this Agreement as provided in Section 8.1 hereof, this Agreement shall forthwith become void and there shall be no liability on the part of any of the parties, except (i) as set forth in Section 5.4(b) , Section 5.6 , this Section 8.2 and Section 8.3 , as well as Article IX to the extent applicable to such surviving sections, each of which shall survive termination of this Agreement, and (ii) that nothing herein shall relieve any party from any further liability for any willful breach of this Agreement. No termination of this Agreement shall affect the obligations of the parties contained in the Confidentiality Agreement, all of which obligations shall survive termination of this Agreement in accordance with their terms.

8.3 Payments

(a) Payment by the Buyer . In the event that this Agreement is terminated by Seller pursuant to Section 8.1(b)(i) or Section 8.1(d) , the Buyer shall promptly, but in no event later than five (5) Business Days after the date of such termination, pay Seller the Termination Fee.

(b) Payment by Seller . In the event that this Agreement is terminated by the Buyer pursuant to Section 8.1(b)(i) , Section 8.1(c) , Section 8.1(e) or Section 8.1(f) , Seller shall promptly, but in no event later than ten Business Days after the date of such termination, pay the Buyer the Termination Fee.

(c) Interest and Costs; Other Remedies . All payments under this Section 8.3 shall be made by wire transfer of immediately available funds to an account designated by the party to receive payment. Each of the Buyer and Seller acknowledges that the agreements contained in this Section 8.3 are an integral part of the transactions contemplated by this Agreement and that, without these agreements, the other party hereto would not enter into this Agreement. Accordingly, if the Buyer or Seller, as the case may be, fails to pay in a timely manner the amounts due pursuant to this Section 8.3 and, in order to obtain such payment, the other party hereto makes a claim that results in a judgment against the party failing to pay for the amounts set forth in this Section 8.3 , the party so failing to pay shall pay to the other party its reasonable costs and expenses (including reasonable attorneys’ fees and expenses) in connection with such suit, together with interest on the amounts set forth in this Section 8.3 at the Prime Rate on the date such payment was required to be made. Payment of the fees described in this Section 8.3 shall be in lieu of damages incurred under this Agreement.

ARTICLE IX

INDEMNIFICATION AND RELATED MATTERS

9.1 Survival; Risk Allocation

(a) All representations, warranties, covenants and agreements set forth in this Agreement, the other Transaction Documents or in any writing or certificate delivered in connection with this Agreement or the transactions contemplated by this Agreement shall survive the Closing Date. Notwithstanding the foregoing, no Party shall be entitled to recover for any Loss pursuant to Section 9.2(a)(i) or Section 9.2(b)(i) , unless written notice of a claim thereof is delivered to the other Party prior to the Applicable Limitation Date. For purposes of this Agreement, the term “ Applicable Limitation Date ” shall mean the eighteen month anniversary of the Closing Date; provided , however , that the Applicable Limitation Date with respect to the following Losses shall be as follows: (i) with respect to any Loss arising from or related to a breach of the representations and warranties of Seller set forth in Section 3.9 (Taxes), the Applicable Limitation Date shall be the 60th day after expiration of the applicable statute of limitations (including any extensions thereto to the extent that such statute of limitations may be tolled), (ii) with respect to any Loss arising from or related to a breach of the representations and warranties of Seller set forth in Section 3.1 (Organization and Corporate Power), Section 3.2 (Authorization of Transactions), and Section 3.8 (Title to Properties), there shall be no Applicable Limitation Date (i.e., such representations and warranties shall survive forever). Following the Closing, the exclusive remedy pursuant to this Agreement and the transactions contemplated hereby based upon the survival of such representations and warranties will be the rights to indemnification, payment of Losses and other remedies provided under this Article IX .

(b) Notwithstanding anything in this Article IX to the contrary, in the event any Party to this Agreement perpetrates a fraud on another Party hereto, any Party that suffers any Loss by reason thereof shall be entitled to seek recovery therefor against the Person or Persons who perpetrated such fraud without regard to any limitation set forth in this Agreement (whether a temporal limitation, a dollar limitation or otherwise).

(c) The representations, warranties, covenants and agreements made herein, as modified by the Schedules, together with the indemnification provisions herein, are intended among other things to allocate the economic cost and the risks inherent in the transactions contemplated hereby between the Parties and, accordingly, a Party shall be entitled to the indemnification or other remedies provided in this Agreement by reason of any breach of any such representation, warranty, covenant or agreement, as modified by the Schedules, by another Party, notwithstanding whether any employee, representative or agent of the Party seeking to enforce a remedy knew or had reason to know of such breach and regardless of any investigation by such Party.

9.2 Indemnification

(a) Subject to each of the limitations set forth in this Article IX , Seller shall indemnify Buyer and its officers, directors, employees, agents, representatives, successors and permitted assigns (collectively, the “ Buyer Parties ”) and hold each of them harmless from and

against and pay on behalf of or reimburse such Buyer Parties in respect of any loss (including diminution in value), Liability, demand, claim, action, cause of action, cost, damage, deficiency, Tax, penalty, fine or expense, whether or not arising out of third-party claims (including, without limitation, interest, penalties, reasonable attorneys’, accountants’ and other professionals’ fees and expenses, court costs and all amounts paid in investigation, defense or settlement of any of the foregoing) but specifically excluding any consequential or punitive damages (other than consequential or punitive damages assessed in connection with claims brought by third-parties) (collectively, “ Losses ” and individually, a “ Loss ”) which any such Buyer Party may suffer, sustain or become subject to, as a result of, in connection with, relating or incidental to or by virtue of:

(i) any breach of any representation or warranty made by Seller contained in this Agreement or the Transaction Documents;

(ii) the breach of any covenant or agreement made by Seller contained in the Transaction Documents;

(iii) any claim for payment of fees or expenses as a broker or finder in connection with the origin, negotiation or execution of this Agreement or the other Transaction Documents or the consummation of the transactions contemplated hereby based upon any alleged agreement, arrangement or understanding between the claimant and Seller or any of its stockholders, agents or representatives;

(iv) the assertion against any Buyer Party of any Liability relating to any Excluded Liability; or

(v) Seller’s ownership, operation or use of the Purchased Assets and the Subject Business prior to the Closing Date (except for any Assumed Liabilities).

(b) Subject to each of the limitations set forth in this Article IX , Buyer shall indemnify Seller and its officers, directors, employees, agents, representatives, successors and permitted assigns (collectively, the “ Seller Parties ”) and hold each of them harmless from and against and pay on behalf of or reimburse Seller Parties in respect of any Loss which any such Seller Party may suffer, sustain or become subject to, as the result of, in connection with, relating or incidental to or by virtue of:

(i) any breach of any representation or warranty made by Buyer contained in this Agreement or the Transaction Documents;

(ii) the breach of any covenant or agreement made by Buyer contained in this Agreement or the Transaction Documents;

(iv) the assertion against any Seller Party of any Liability relating to an Assumed Liability; or

(v) Buyer’s ownership, operation or use of the Purchased Assets and the Subject Business from and after the Closing Date.

(i) No Party shall be liable hereunder with respect to claims referred to in Section 9.2(a)(i) or Section 9.2(b)(i) above, unless the other Party gives written notice thereof within the Applicable Limitation Date. Notwithstanding any implication to the contrary contained in this Agreement, so long as a Party delivers written notice of a claim no later than the Applicable Limitation Date, the other Party shall be required to indemnify hereunder for all Losses that such Parties may incur (subject to the Basket and the Cap, if applicable) in respect of the matters that are the subject of such claim, regardless of when incurred.

(ii) Notwithstanding anything contained in this Agreement to the contrary (but subject to the remainder of this Section 9.2(c)(ii) ), no Indemnifying Party shall be liable to the Buyer Parties or Seller Parties, as the case may be, (A) for any Loss arising under Section 9.2(a)(i) or Section 9.2(b)(i) above, unless the aggregate amount of all Losses incurred by the Buyer Parties or Seller Parties, as applicable, exceeds $75,000 (the “ Basket ”), in which case, subject to the Cap (as defined below), such Indemnifying Party shall be liable for all such Losses in excess of such amount, (B) for any Loss arising under Section 9.2(a)(i) or Section 9.2(b)(i) to the extent that the aggregate amount of all such Losses exceeds $2,200,000 (the “ Cap ”), or (C) for consequential damages, punitive or exemplary damages, special damages, lost profits or incidental damages. Notwithstanding anything contained in this Agreement to the contrary, (x) the Basket and the Cap shall not apply with respect to any Loss arising from or related to a breach of (a) any covenants of any Party or (b) the representations and warranties set forth in Section 3.1 (Organization and Corporate Power), Section 3.2 (Authorization of Transactions), Section 3.9 (Taxes), and Section 3.8 (Title to Properties).

(iii) In determining the amount of the Basket and any Losses for which a Party is entitled to assert a claim for indemnification hereunder, such amounts shall be determined after deducting therefrom the amount of any insurance proceeds (after giving effect to any applicable deductible or retention) and other third party recoveries in respect of such Losses. The Parties shall use reasonable efforts to mitigate the amount of Losses for which it may be entitled to indemnification hereunder.

(d) If a Party seeks indemnification under this Article IX , such Party (the “ Indemnified Party ”) shall give written notice to the other Party (the “ Indemnifying Party ”) promptly after receiving written notice of any action, lawsuit, proceeding, investigation or other claim against it (if by a third-party) or discovering the Liability, obligation or facts giving rise to such claim for indemnification, describing the claim, the amount thereof (if known and quantifiable), and the basis thereof; provided , however , that the failure to so notify the Indemnifying Party promptly shall not relieve the Indemnifying Party of its Liabilities hereunder except to the extent such failure shall have materially prejudiced the Indemnifying Party. In that

regard, if any action, lawsuit, proceeding, investigation or other claim shall be brought or asserted by any third-party that, if adversely determined, would entitle the Indemnified Party to indemnity pursuant to Article IX , the Indemnifying Party shall be entitled to control the defense of such action, lawsuit, proceeding, investigation or other claim giving rise to the Indemnified Party’s claim for indemnification at the Indemnifying Party’s expense, and at the Indemnifying Party’s option (subject to the limitations set forth below) shall be entitled to appoint lead counsel of such defense with a reputable counsel reasonably acceptable to the Indemnified Party; provided , however , that, in the event that the Indemnifying Party elects to control such defense, such Party shall be deemed to have agreed to be fully responsible (with no reservation of rights) for all Losses relating to such claims, subject to the limitations set forth in Section 9.2(c)(ii) .

Notwithstanding any provision contained herein to the contrary, the Indemnifying Party shall not have the right to assume control of such defense and shall pay the reasonable fees and expenses of counsel retained by the Indemnified Party, if the claim over which the Indemnifying Party seeks to assume control (i) seeks non-monetary relief, (ii) involves criminal or quasi-criminal allegations, (iii) involves a claim to which the Indemnified Party reasonably believes an adverse determination would have a material and adverse effect on the Indemnified Party’s reputation or future business prospects, (iv) involves a claim that, upon petition by the Indemnified Party, the appropriate court rules that the Indemnifying Party failed or is failing to vigorously prosecute or defend or (v) involves a claim that is reasonably expected to result in Liability to the Indemnified Party in excess of the Cap.

The foregoing paragraph shall not apply to any third-party claim that relates to any Excluded Liabilities or Excluded Assets, over which Seller shall have exclusive control, including the right to control the defense or settlement of any such claim; provided , however , that the Buyer Parties shall be entitled to participate in the defense of any such third-party claim to the extent reasonably required to protect such Buyer Parties’ interests.

If the Indemnifying Party exercises the right to control the defense of any third-party claim as provided above, then the Indemnified Party shall have the right to employ its own counsel in any such action and to participate in the defense thereof at its own expense, unless the Indemnifying Party has specifically authorized the employment of such counsel in writing, in which case the fees and expenses of such counsel shall be borne by the Indemnifying Party. Similarly, if the Indemnified Party controls the defense of any such claim, then the Indemnifying Party shall have the right to employ its own counsel in any such action and to participate in the defense thereof at its own expense. If the Indemnified Party determines in its reasonable discretion that there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its own counsel in each jurisdiction for which the Indemnified Party determines counsel is required, at the expense of the Indemnifying Party.

In the event that the Indemnifying Party exercises the right to control the defense of any third-party claim as provided above, then the Indemnified Party shall cooperate with the Indemnifying Party in such defense. Similarly, in the event that the Indemnified Party is, directly or indirectly, controlling the defense of any such claim, then the Indemnifying Party shall cooperate with the Indemnified Party in such defense. The Indemnifying Party shall obtain the prior written consent of the Indemnified Party before entering into any settlement of a claim or ceasing to defend such

claim, if such settlement or cessation (i) involves the imposition of an injunction or other equitable relief on the Indemnified Party, (ii) does not expressly unconditionally release the Indemnified Party from all Liabilities with respect to such claim and all other claims arising out of the same or similar facts and circumstances, with prejudice, or (iii) could adversely affect any Tax or other Liability of Buyer or any Buyer Parties.

(e) Amounts paid to or on behalf of any Party as indemnification under this Agreement shall be treated as adjustments to the Purchase Price.

(f) If and to the extent any provision of this Article IX is unenforceable for any reason, the Indemnifying Party hereby agrees to make the maximum contribution to the payment and satisfaction of any Loss for which indemnification is provided for in this Section 9.2 that is permissible under applicable legal requirements.

(g) Subject to Section 9.1(b) , from and after the Closing, the indemnification provided pursuant to this Article IX shall be the sole and exclusive remedy hereto for any Loss resulting from, with respect to or arising out of any breach or claim in connection with this Agreement, any Exhibit or Schedule hereto or any certificate or writing delivered in connection with this Agreement, regardless of the cause of action. Notwithstanding the foregoing, nothing contained in this Agreement shall limit a Party’s right to pursue equitable remedies, including, without limitation, injunctive relief and specific performance.

(h) No Indemnifying Party shall in any event be liable to the Buyer Parties or Seller Parties, as applicable, on account of any indemnification obligation set forth in this Article IX for any such Person’s own punitive or exemplary damages; provided , however , that nothing herein shall relieve any Indemnifying Party of its obligation to provide indemnification under this Article IX for all components of awards against the Buyer Parties or Seller Parties, as applicable, in third-party claims, including punitive or exemplary damages.

(i) Notwithstanding the fact that any Party may have the right to assert claims for indemnification under or in respect of more than one provision of this Agreement or another agreement entered into in connection herewith in respect of any fact, event, condition or circumstance, no Party shall be entitled to recover the amount of any Losses suffered by such Party more than once under all such agreements in respect of such fact, event, condition or circumstance.

ARTICLE X

MISCELLANEOUS

10.1 Amendment

This Agreement may not be amended or modified, except (a) by an instrument in writing signed by or on behalf of Buyer and Seller or (b) by a waiver in accordance with Section 10.2 .

10.2 Waiver

Any Party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of the other Parties, (b) waive any inaccuracy in the representations and warranties of another Party contained herein or in any document delivered by such Party pursuant hereto or (c) waive compliance with any agreement of another Party or condition to another Party’s obligations contained herein. Any such extension or waiver shall be valid only if set forth in a writing executed by the Party to be bound thereby. Any waiver of any term or condition shall not be construed as a wavier of any subsequent breach or waiver of the same term or condition or as a waiver of any other term or condition of this Agreement. The failure of any Party to assert any of its rights under this Section 10.2 shall not constitute a waiver of any of such rights. No course of dealing between or among any Persons having any interest in this Agreement shall be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any Party under or by reason of this Agreement. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.

10.3 Notices

All notices, claims, demands and other communications given or delivered under this Agreement shall be in writing and shall be deemed to have been duly made or given when personally delivered, delivered by receipted express courier service, or via facsimile with a copy delivered by receipted express courier service to the respective Parties at the following addresses (or such other address for a Party as shall be specified in a notice given in accordance with this Section 10.3 ):

If to Seller:		with a copy to:

BIO-key International, Inc. 300 Nickerson Road Marlborough, MA 01752 Facsimile: (308) 801-1819 Attention: President		Choate Hall & Stewart LLP Two International Place Boston, MA 02110 Facsimile: (617) 248-4000 Attention: Charles J. Johnson, Esq.

If to Buyer:		with copies to:

InterAct911 Systems 102 W 3rd St., Ste 750 Winston-Salem, NC 27101 Facsimile: Attention: President		McDermott Will & Emery LLP 227 West Monroe Street Chicago, Illinois 60606-5096 Facsimile: (312) 984-7700 Attention: Robert A. Schreck, Jr., P.C.

10.4 Binding Agreement; Assignment

This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns; provided , however , that neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by operation of law or otherwise without the prior written consent of Seller and Buyer.

Notwithstanding anything to the contrary in this Section 10.4 , without the consent of any Party, Buyer and its permitted assigns may at any time, in their sole discretion, assign, in whole or in part, their rights hereunder to one or more third-parties (provided that no such assignment shall release Buyer from its obligations hereunder).

10.5 Severability

Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law or public policy, such provision shall be ineffective only to the extent of such prohibition or invalidity, and all other terms of this Agreement shall remain in full force and effect for so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party.

10.6 Construction

The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any Person. The word “ including ” shall mean including, without limitation, regardless of whether such words are included in some contexts but not others.

10.7 Captions

The captions used in this Agreement are for convenience of reference only and do not constitute a part of this Agreement and shall not be deemed to limit, characterize or in any way affect any provision of this Agreement, and all provisions of this Agreement shall be enforced and construed as if no caption had been used in this Agreement.

10.8 Entire Agreement

The Schedules identified in this Agreement are incorporated herein by reference. This Agreement and the documents referred to herein contain the entire agreement between the Parties and supersede any prior understandings, agreements or representations by or between the Parties, written or oral, which may have related to the subject matter hereof in any way, including the Letter of Intent.

10.9 Counterparts

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

10.10 Governing Law

All question concerning the construction, validity and interpretation of this Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts applicable to contracts executed in and to be performed in that State.

10.11 Parties in Interest

Nothing in this Agreement, express or implied, is intended to confer on any Person other than the Parties and their respective successors and assigns any rights or remedies under or by virtue of this Agreement.

10.12 Consent to Jurisdiction

THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY PURSUANT TO THIS AGREEMENT SHALL PROPERLY AND EXCLUSIVELY LIE IN ANY FEDERAL OR STATE COURT LOCATED IN SUFFOLK COUNTY, BOSTON, MASSACHUSETTS. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION.

* * * *

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by an officer thereunto duly authorized, all as of the day and year first above written.

BUYER:		SELLER:

InterAct911 Mobile Systems, Inc.		BIO-key International, Inc.


By:		By:
	Andrew J. Filipowski		Thomas J. Colatosti
	Chairman		Chairman

[Signature Page to Asset Purchase Agreement]

Exhibit 10.84

NOTE AMENDMENT AND EXTENSION AGREEMENT

This NOTE AMENDMENT AND EXTENSION AGREEMENT (“ Agreement ”) is made effective as of November 3, 2009, between BIO-KEY INTERNATIONAL, INC. (“ Company ”), and THE SHAAR FUND, LTD. (“ Holder ”).

RECITALS :

A. The Holder is the holder of the Eight Percent (8%) Promissory Note Due November 3, 2009 issued by the Company in the principal amount of $1,000,000 (the “ Note ”), the full principal amount of which, together with accrued interest, is outstanding on the date hereof.

B. At the request of the Company, the Holder has agreed to extend the Maturity Date of the Note as hereinafter set forth.

C. Capitalized terms used herein without definition shall have the respective meanings ascribed to them in the Note.

NOW, THEREFORE, for and in consideration of the premises and mutual covenants and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties covenant and agree as follows:

1. Representation and Warranty . The Company represents and warrants to the Holder that no Payment Default or Event of Default has occurred and is continuing under the Note.

2. Amendment and Extension . Subject to the truth and accuracy of the foregoing representation and warranty, effective as of the date hereof, the Note is amended as follows:

(a) the first sentence of the Note is amended to read as follows:

“FOR VALUE RECEIVED, BIO-KEY INTERNATIONAL, INC., a corporation duly organized and validly existing under the laws of the State of Delaware, U.S.A. (the “ Company ”), promises to pay to the order of THE SHAAR FUND, LTD., the registered holder hereof and its successors and assigns (the “ Holder ”), One Million Dollars ($1,000,000), and to pay interest on the principal sum outstanding, at the rate of eight percent (8%) per annum, due and payable on the date that is the earlier to occur of (a) the fifth (5 th ) business day after the occurrence of the Closing under and as defined in the Asset Purchase Agreement dated August 13, 2009, as now or hereafter amended, restated, supplemented or otherwise modified, between the Company and InterAct911 Mobile Systems, Inc., or (b) January 31, 2010 (the “ Maturity Date ”).”

(b) a new subsection (h) is added to Section 6 (and the following subsection is re-lettered as subsection (i)) which shall read as follows:

“(h) the Company shall default in the payment of any other outstanding indebtedness incurred or guaranteed by the Company beyond any period of notice and opportunity to cure, or the payment of such indebtedness shall be accelerated by the holder thereof; or”

3. General Provisions .

(a) The amendment and extension set forth herein shall not affect any other term or provision of the Note, which Note, as amended and extended hereby, shall continue in full force and effect and is hereby ratified and approved by the Company.

(b) This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which constitute the same instrument.

[No further text on this page]

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.

	Company :

	BIO-KEY INTERNATIONAL, INC.


	By:	/s/ Thomas J. Colatosti
		Name: Thomas J. Colatosti
		Title: Chairman


	Holder :

	THE SHAAR FUND, LTD.


	By:
		Name:
		Title:

Exhibit 10.85

SECURITIES EXCHANGE AGREEMENT

This Securities Exchange Agreement (the “ Agreement ”) is entered into as of November 12, 2009 by and among BIO-key International, Inc., a Delaware corporation (the “ Company ”), The Shaar Fund, Ltd. (“ Shaar ”), Thomas J. Colatosti (“ TJC ” and, together with Shaar, collectively the “ Holders ” and individually a “ Holder ”).

Introduction

At the request of the Company, Shaar (a) has extended the due date of the Company’s Eight Percent (8%) Promissory Note Due November 3, 2009, in the principal amount of $1,000,000, pursuant to a Note Amendment and Extension Agreement dated as of November 3, 2009 between the Company and Shaar, and (b) has made a bridge loan to the Company in the principal amount of $750,000, evidenced by the Company’s Six Percent (6%) Promissory Note dated November 12, 2009, and, in consideration thereof, the Company has agreed to enter into this Agreement.

Shaar is the holder of 27,932 shares, and TJC is the holder of 2,625 shares (collectively the “ Exchanged Shares ”), of the Company’s Series A Convertible Preferred Stock, $0.0001 par value per share (the “ Series A Preferred Stock ”). The Company and the Holders desire to exchange (a) all dividends accrued and unpaid on their Exchanged Shares for the Convertible Notes (as defined below) to and including the Closing Date (as defined below), and the Company and (b) the Exchanged Shares for the Company’s Series D Convertible Preferred Stock, $0.0001 par value per share (the “ Series D Preferred Stock ”), and the Warrants (as defined below) on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1. Exchange of the Exchanged Shares for the Notes, the Series D Preferred Stock and the Warrants .

1.2 Authorization of the Series D Preferred Stock. The Company has authorized, approved and adopted the Certificate of Designation of the Series D Preferred Stock of the Company, consisting of 100,000 shares, in the form attached hereto as Exhibit B (the “ Series D Certificate of Designation ”), and has authorized the issuance of 27,932 shares of the Series D Preferred Stock to Shaar and 2,625 shares of the Series D Preferred Stock to TJC, in exchange for the Series A Preferred Stock owned by the respective Holders.

1.3 Authorization of the Warrant. The Company has authorized the issuance of Warrants to purchase up to 5,000,000 shares of the Company’s Common Stock, $0.0001 par value per share (“ Common Stock ”), in the form attached hereto as Exhibit C (the “ Warrants ”), including up to 4,750,000 shares to Shaar and up to 250,000 shares to TJC on the terms and conditions set forth in this Agreement.

1.4 The Exchange. In exchange for the delivery by the Holders of the Exchanged Shares, the Company agrees, in full settlement of the Company’s obligations (as of the Closing Date) under the Series A Certificate of Designation (as defined below) and the Exchanged Shares, to issue and deliver to the Holders his or its Convertible Note, the Series D Preferred Stock and the Warrants (the “ Exchange ”). Other than as set forth in this Agreement, the Exchange shall be made without any additional consideration payable to or by the Holders or the Company. As used herein, “ Series A Certificate of Designation ” means the Certificate of Designation of the Company filed with the Secretary of State of the State of Delaware on July 28, 2004, which provides for the designation of the rights and preferences of the Series A Preferred Stock.

1.5 Closing. The closing of the Exchange on the terms and conditions set forth in this Agreement (the “ Closing ”) shall take place remotely via the exchange of documents and signatures at 10:00 a.m. EST on the date that is five (5) days after the satisfaction or waiver of all of the conditions set forth in Section 4 hereof, or on such other date as the parties hereto may agree (the “ Closing Date ”).

1.6 Closing Documents and Payments. At the Closing, (a) the Company shall deliver to the Holders the Convertible Notes, the Series D Preferred Stock and the Warrants and (b) each Holder shall deliver to the Company stock certificate(s) representing its or his Exchanged Shares, together with a duly executed transfer power transferring its or his Exchanged Shares to the Company for cancellation.

2. Representations and Warranties of the Holder . The Holders, severally and not jointly, each represents and warrants to the Company as follows:

3. Representations and Warranties of the Company . The Company represents and warrants to the Holder as follows:

4. Conditions Precedent to the Holders’ Obligations . it shall be a condition precedent to each of the Holders’ obligations under this Agreement that all of the following requirements are satisfied:

5. Miscellaneous .

If to the Company or to TJC, to: or c/o		BIO-key International, Inc.
		3349 Highway 138
		Building D, Suite B
		Wall, NJ 07719
		Attn: Chief Executive Officer
		Facsimile: [ ]

with a copy (which shall not constitute notice) to:		Choate, Hall & Stewart LLP Two International Place Boston, MA 02110 Attention: Charles J. Johnson, Esq. Facsimile: (617) 248-4000

If to Shaar, to:		The Shaar Fund Ltd.
		c/o Maarten Robberts
		SS&C Fund Services N.V.
		Pareraweg 45
		Curacao, Netherlands Antilles
		Facsimile: (599-9) 434-3560

with a copy (which shall not constitute notice) to:		Meltzer, Lippe, Goldstein & Breitstone, LLP 190 Willis Avenue Mineola, NY 11501 Attention: Ira R. Halperin, Esq. Facsimile: (516) 747-0653

Transferees

Address

Percentage
Transferred

Number
Transferred

[Signature pages follow]

IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as a sealed instrument as of the date first written above.

	THE COMPANY :

	BIO-KEY INTERNATIONAL, INC.


	By:	/s/ Thomas J. Colatosti
		Name: Thomas J. Colatosti
		Title: Chairman

	THE HOLDERS :

	THE SHAAR FUND, LTD.


	By:	SS&C Fund Services N.V.

	By:
		Name:
		Title:


		/s/ Thomas J. Colatosti
		Thomas J. Colatosti

Exhibit A

Form of Convertible Note

Exhibit B

Form of Series D Certificate of Designation

Exhibit C

Form of Warrant

Exhibit 10.86

EXECUTION COPY

INTERACT911 MOBILE SYSTEMS, INC.

GUARANTEED SECURED PROMISSORY NOTE

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR QUALIFIED UNDER ANY OTHER APPLICABLE SECURITIES LAWS. THIS NOTE MAY NOT BE TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE MAKER IS SATISFIED THAT SUCH DISPOSITION DOES NOT VIOLATE APPLICABLE SECURITIES LAWS. ANY TRANSFEREE OF THIS NOTE SHALL BE BOUND BY THE PROVISIONS OF THE ASSET PURCHASE AGREEMENT, DATED AUGUST , 2009, AMONG MAKER AND PAYEE, COPIES OF WHICH ARE ON FILE AT THE OFFICE OF MAKER.

$4,000,000	December , 2009
	Winston-Salem, North Carolina

FOR VALUE RECEIVED, the undersigned, InterAct911 Mobile Systems, Inc., a Delaware corporation (“ Maker ”), promises to pay to the order of BIO-key International, Inc., a Delaware corporation (“ Payee ”), its successors and assigns, the principal sum of Four Million Dollars ($4,000,000) in three annual installments, as follows: (1) One Million Three Hundred Thirty-Four Thousand Dollars ($1,334,000) on the first anniversary of the date hereof, (2) One Million Three Hundred Thirty-Three Thousand Dollars ($1,333,000) on the second anniversary of the date hereof, and (3) One Million Three Hundred Thirty-Three Thousand Dollars ($1,333,000) on the third anniversary of the date hereof, together with interest from the date hereof on the principal sum from time to time outstanding at the rate provided for below.

The principal amount of this Note shall bear interest at a rate per annum equal to six percent (6%), compounded annually. Interest shall be payable quarterly in arrears in cash on January 1, April 1, July 1 and October 1 of each year, commencing January 1, 2010. All payments hereunder shall be applied first to accrued interest and then to the unpaid principal balance hereof in the inverse order of maturity.

This Note may be prepaid in whole or in part at any time without premium or penalty. Partial prepayments shall be applied to unpaid installments of principal to become due hereunder in the inverse order of their maturity. All amounts not paid when due under this Note shall bear interest until paid at a rate of twelve percent (12%) per year or the maximum rate allowed by law, whichever is less. Such interest shall be immediately due and payable.

This Note is issued pursuant to, and is entitled to the benefits of and subject to the terms and provisions of, that certain Asset Purchase Agreement, dated as of August 13, 2009 (as amended, restated, supplemented or otherwise modified from time to time, the “ Asset Purchase Agreement ”) by and between Maker and Payee. All capitalized terms used herein without definition shall have the meanings given to them in the Asset Purchase Agreement. This Note is secured by the IP Security Agreement.

For purposes of this Note, an “ Event of Default ” shall be deemed to have occurred if:

(a) Maker shall fail to pay any installment of principal or interest due to Payee hereunder within three (3) Business Days of the date due;

(b) a Change of Control occurs;

(c) Maker shall (i) have entered involuntarily against it an order for relief under the United States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make a general assignment for the benefit of creditors, (iv) apply for, seek, consent to or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its property, (v) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (vi) take any action authorizing of any matter described in parts (c)(i) through (c)(v) above, or (vii) fail to contest in good faith any appointment or proceeding described in part (d) below;

(d) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for Maker, or any substantial part of any of its property, or a proceeding described in part (c)(v) above shall be instituted against Maker;

(e) Maker shall be dissolved or liquidated;

(f) Maker shall complete an underwritten public offering of its securities under the Securities Act of 1933, as amended;

(g) Maker shall receive proceeds from equity capital financings after the date hereof that collectively exceed Twenty Million Dollars ($20,000,000); or

(h) this Note or any of the documents contemplated hereby shall for any reason not be or shall cease to be in full force and effect or are declared to be null and void, or the Note shall for any reason fail to create a valid and perfected first priority lien in favor of the Payee in the Collateral (as defined in the IP Security Agreement) purported to be covered by the IP Security Agreement except as expressly permitted by the terms thereof, or Maker takes any action for the purpose of terminating, repudiating or rescinding the Note or any document executed in connection herewith by it or any of its obligations hereunder or thereunder.

As used herein, “ Change of Control ” means (i) any merger, consolidation, share exchange, business combination, issuance of securities, acquisition of securities, tender offer, exchange offer or other similar transaction (A) in which Maker is a constituent corporation, (B) in which a Person or “group” (as defined in the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder) of Persons directly or indirectly acquires beneficial or record ownership of securities representing more than 50% of the outstanding voting securities of Maker, or (C) in which Maker issues securities representing more than 50% of the outstanding securities of any class of voting securities of Maker or (ii) any sale, lease, exchange, transfer, license, acquisition

or disposition of any assets that constitute more than 50% of the assets of Maker on a consolidated basis.

Upon the occurrence of an Event of Default, Payee may, at its option, upon written notice to Maker, declare the entire amount of unpaid principal of this Note, together with any accrued and unpaid interest thereon, immediately due and payable; provided , that if an Event of Default of the type described in parts (b), (c) or (d) above has occurred, the entire amount of unpaid principal of this Note, together with any accrued and unpaid interest thereon, shall become immediately due and payable without any action on the part of Payee, and Maker shall immediately pay to Payee all amounts due and payable with respect to such outstanding principal amount, together with all accrued interest thereon. No remedy herein conferred upon Payee is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.

If this Note is not paid at maturity, whether by acceleration or otherwise, Maker shall pay all costs and expenses of collection and enforcement, including court costs and reasonable attorneys’ fees.

Payments of principal and interest on this Note shall be made in such coin or currency of the United States of America as of the time of payment shall be legal tender for public and private debts and shall be made to Payee at 33349 Highway 138, Wall, New Jersey 07719 or at such other place as the holder hereof may from time to time in writing direct.

All notices, claims, demands and other communications given or delivered under this Note shall be in writing and shall be delivered in accordance with the Asset Purchase Agreement.

This Note may not be negotiated, transferred, pledged or assigned by Payee without the written consent of Maker, which consent shall not be unreasonably withheld or delayed.

Each party signing or endorsing this Note waives presentment, demand, protest, notice of dishonor and all other demands and notices in connection with the delivery acceptance, performance or enforcement of this Note to the extent permitted by applicable law.

Upon receipt of evidence satisfactory to the Maker of the loss, theft, destruction or mutilation of this Note and, in the case of any such loss, theft or destruction, upon delivery of indemnity reasonably satisfactory to the Maker, or in case of such mutilation, upon surrender and cancellation of this Note, the Maker will issue a new note, of like tenor, in lieu, and dated the date, of such lost, stolen, destroyed or mutilated Note.

This Note shall be governed by the laws of the State of Delaware.

IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the date first written above.

	InterAct911 Mobile Systems, Inc.

	By:
		President


ATTEST:



Secretary

SIGNATURE PAGE TO PROMISSORY NOTE

GUARANTY

FOR VALUE RECEIVED, each of InterAct911 Corporation, a Delaware corporation, and SilkRoad Equity LLC, a Delaware limited liability company (each a “ Guarantor ”), hereby irrevocably and unconditionally guarantees to the holder of the Note upon which this Guaranty is endorsed, the due and punctual payment of the principal of and interest (including any additional interest required to be paid according to the terms of said Note) on this Note as well as all costs and expenses of collection and enforcement, when and as the same shall become due and payable, all in accordance with the terms of the Note.

Each Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Note; the absence of any action to enforce the same; any waiver or consent by the holder of the Note with respect to any provisions thereof; any dispute, claim, counterclaim, defense or other right which the Guarantor may have to assert against the Payee; or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Maker, any right to require a proceeding first against the Maker, protest, notice and all demands whatsoever and covenants that this Guaranty will not be discharged, except by complete performance of the obligations contained in the Note and in this Guaranty.

Each Guarantor hereby certifies and warrants that all acts, conditions and things required to be done and performed and to have happened precedent to the creation and issuance of this Guaranty to constitute the same, the valid, binding and enforceable obligation of the Guarantor have been done and performed in due compliance with all applicable laws. This Guaranty shall be governed by and construed in accordance with the laws of the State of Delaware.

IN WITNESS WHEREOF, each of the undersigned has caused this Guaranty to be executed as of the day of December, 2009 in its name by a person thereunto duly authorized.

		InterAct911 Corporation


		By:
ATTEST:


Secretary

		SilkRoad Equity, LLC


		By:
ATTEST:

SIGNATURE PAGE TO GUARANTY

Exhibit 10.87

EXECUTION COPY

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO BIO-KEY INTERNATIONAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

Right to Purchase up to 8,000,000 Shares of Common Stock of
BIO-key International, Inc.
(subject to adjustment as provided herein)

COMMON STOCK PURCHASE WARRANT

No.	Issue Date: December , 2009

BIO-KEY INTERNATIONAL, INC., a corporation organized under the laws of the State of Delaware (“ BIO-key ”), hereby certifies that, for value received, SILKROAD EQUITY, LLC, or assigns (the “ Holder ”), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business the fifth anniversary of the date hereof (the “ Expiration Date ”), up to Eight Million (8,000,000) fully paid and nonassessable shares (the “ Initial Number ” of Warrant Shares) of Common Stock (as defined below) at the applicable Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein.

As used herein the following terms, unless the context otherwise requires, have the following respective meanings:

(a) The term “ Company ” shall include BIO-key and any corporation which shall succeed, or assume the obligations of, BIO-key hereunder.

(b) The term “ Common Stock ” includes (i) the Company’s Common Stock, par value $0.0001 per share; and (ii) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.

(c) The term “ Other Securities ” refers to any capital stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise.

(d) The term “ Exercise Price ” means the Initial Price, as adjusted from time to time as provided herein.

(e) The term “ Initial Price ” means $0.30 per share.

1. Exercise of Warrant .

1.1 Number of Shares Issuable upon Exercise . From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of an exercise notice in the form attached hereto as Exhibit A (the “ Exercise Notice ”), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4.

1.2 Company Acknowledgment . The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights.

2. Procedure for Exercise .

2.1 Delivery of Stock Certificates, Etc., on Exercise . The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value (as defined below) of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. For purposes hereof, the “ Fair Market Value ” of a share of Common Stock as of a particular date (the “ Determination Date ”) shall mean:

(a) If the Company’s Common Stock is traded on the NYSE Amex Equities exchange or another national exchange or is quoted on the Global or Capital Market of The NASDAQ Stock Market, Inc.(“ Nasdaq ”), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date.

(b) If the Company’s Common Stock is not traded on the NYSE Amex Equities exchange or another national exchange or on the Nasdaq, but is traded on the FINRA

OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date.

(c) Except as provided in clause (d) below, if the Company’s Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided.

(d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company’s certificate of incorporation, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date.

2.2 Exercise . Payment may be made in cash or by certified or official bank check payable to the order of the Company or by wire transfer in an amount equal to the applicable aggregate Exercise Price for the number of shares of Common Stock specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein.

3. Effect of Reorganization, Etc .

3.1 Reorganization, Consolidation, Merger, Etc . In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4.

3.2 Dissolution . In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant pursuant to Section 3.1, or, if the Holder

shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in New York, NY as trustee for the Holder of the Warrant (the “ Trustee ”).

3.3 Continuation of Terms . Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then the Company’s securities and property (including cash, where applicable) receivable by the Holders of the Warrant will be delivered to Holder or the Trustee as contemplated by Section 3.2.

4. Certificate as to Adjustments . In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 9 hereof).

5. Reservation of Stock Issuable on Exercise of Warrant . The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant.

6. Investment Representations . In connection with the Holder’s acquisition of this Warrant, the Holder hereby represents and warrants to the Company as follows:

(a) The Holder is acquiring this Warrant for its own account for investment only, and not with a view to, or for sale in connection with, any distribution of this Warrant in violation of the Securities Act of 1933, as amended (the “ Securities Act ”), any rule or regulation under the Securities Act, or any state, foreign or other securities laws.

(b) The Holder acknowledges that an investment in this Warrant involves a high degree of risk.

(c) The Holder is able to protect its own interest in the transactions contemplated hereby, can bear the economic risk of this investment (including possible complete loss of such investment) for an indefinite period of time and has such knowledge and experience in financial or business matters such that he is capable of evaluating the merits and risks of the investment in this Warrant.

(d) The Holder understands that this Warrant has not been registered under the Securities Act or under the securities laws of any jurisdiction, by reason of reliance upon certain exemptions, and that the reliance of the Company on such exemptions is predicated upon the accuracy of the representations and warranties contained herein.

(e) The Holder has had the opportunity to ask questions of and receive answers from representatives of the Company and to obtain additional information, documents and records relating to the Company, its business and the investment contemplated hereby.

(f) The Holder understands that this Warrant is characterized as a “restricted security” under the federal securities laws inasmuch as it has been acquired in a transaction not involving a public offering and that under such laws and applicable regulations (and under other applicable securities laws) such Securities may not be transferred or resold without registration under the Securities Act or other applicable laws or pursuant to a valid exemption from registration under the Securities Act and such laws. The Holder understands that the Company requires an opinion of counsel satisfactory to the Company that registration is not required as a condition to any transfer where this Warrant is not being registered.

(g) The Holder understands that the Company will be under no obligation to register this Warrant under the Securities Act (or any other applicable securities laws).

(h) The Holder is familiar with Securities and Exchange Commission Rule 144 and understands the resale limitations imposed thereby and by the Securities Act ; and

(i) The Holder is an “Accredited Investor” pursuant to Rule 501 of Regulation D under the Securities Act.

7. Assignment; Exchange of Warrant . This Warrant may not be transferred or assigned unless and until the $4,000,000 Guaranteed Secured Promissory Note, dated December , 2009 issued by InterAct911 Mobile Systems, Inc. to BIO-key has been paid in full and cancelled. Subject to the foregoing sentence and compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a “ Transferor ”) in whole or in part. On the surrender for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B attached hereto (the “ Transferor Endorsement Form ”) and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, the provision of a legal opinion from the Transferor’s counsel (at the Company’s expense) that such transfer is exempt from the registration requirements of applicable securities laws, and with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a

“ Transferee ”), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor.

8. Replacement of Warrant . On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.

9. Warrant Agent . The Company may, by written notice to the each Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

10. Transfer on the Company’s Books . Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.

11. Notices, Etc . All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company.

12. Miscellaneous . This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of Delaware without regard to principles of conflicts of laws. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Warrant as of the date first written above.

			BIO-KEY INTERNATIONAL, INC.

			By:
			Name:
			Title:


Acknowledged and agreed:

SILKROAD EQUITY, LLC

By:
Name:
Title:

SIGNATURE PAGE TO WARRANT

EXHIBIT A

FORM OF SUBSCRIPTION

(To Be Signed Only On Exercise Of Warrant)

TO: BIO-key International, Inc.

Attention: Chief Financial Officer

The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ), hereby irrevocably elects to purchase (check applicable box) shares of the Common Stock covered by such Warrant.

The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $ in lawful money of the United States.

The undersigned requests that the certificates for such shares be issued in the name of, and delivered to whose address is .

The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “ Securities Act ”) or pursuant to an exemption from registration under the Securities Act.

Dated:
			(Signature must conform to name of holder as specified on the face of the Warrant)
			Address:

A-1

EXHIBIT B

FORM OF TRANSFEROR ENDORSEMENT

(To Be Signed Only On Transfer Of Warrant)

For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “ Transferees ” the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of BIO-key International, Inc. into which the within Warrant relates specified under the headings “Percentage Transferred” and “ Number Transferred ,” respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of BIO-key International, Inc. with full power of substitution in the premises.

Dated:
			(Signature must conform to name of holder as specified on the face of the Warrant)
			Address:


			SIGNED IN THE PRESENCE OF:



			(Name)

ACCEPTED AND AGREED:
[TRANSFEREE]


(Name)

B-1

Exhibit 10.88

Right to Purchase up to 4,750,000 Shares of Common Stock of
BIO-key International, Inc.
(subject to adjustment as provided herein)

COMMON STOCK PURCHASE WARRANT

No. W-09-1

Issue Date: December 28, 2009

BIO-KEY INTERNATIONAL, INC., a corporation organized under the laws of the State of Delaware (“ BIO-key ”), hereby certifies that, for value received, THE SHAAR FUND, LTD., or assigns (the “ Holder ”), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business the fifth anniversary of the date hereof (the “ Expiration Date ”), up to Four Million Seven Hundred Fifty Thousand (4,750,000) fully paid and nonassessable shares (the “ Initial Number ” of Warrant Shares) of Common Stock (as defined below) at the Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the Exercise Price per share are subject to adjustment as provided herein.

As used herein the following terms, unless the context otherwise requires, have the following respective meanings:

(a) The term “ Company ” shall include BIO-key and any corporation which shall succeed, or assume the obligations of, BIO-key hereunder.

(d) The term “ Exercise Price ” means $0.30 per share, as adjusted from time to time as provided herein.

1. Exercise of Warrant .

1.2 Company Acknowledgment . The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof, acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights.

1.3 Trustee for Warrant Holders . In the event that a bank or trust company shall have been appointed as trustee for the holders of the Warrant pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1.

2. Procedure for Exercise .

(a) If the Company’s Common Stock is traded on the NYSE Amex Equities exchange or another national exchange or is quoted on the Global or Capital Market of The

NASDAQ Stock Market, Inc.(“ Nasdaq ”), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date.

(b) If the Company’s Common Stock is not traded on the NYSE Amex Equities exchange or another national exchange or on the Nasdaq, but is traded on the FINRA OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date.

2.2 Exercise . Payment may be made either (i) in cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, or shares of Common Stock and/or Common Stock receivable upon exercise of the Warrant in accordance with the formula set forth below, (iii) by application of amounts due to the Holder under and in accordance with the terms of the Seven Percent (7%) Convertible Note dated the date hereof issued by the Company to the Holder (the “Note”), or (iv) by a combination of any of the foregoing methods, for the number of Common Shares specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:

X = Y (A-B)

Where X =

the number of shares of Common Stock to be issued to the Holder

Y =	the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation)

A =	the Fair Market Value of one share of the Company’s Common Stock (at the date of such calculation)

B =	Exercise Price (as adjusted to the date of such calculation)

3. Effect of Reorganization, Etc .

3.1 Reorganization, Consolidation, Merger, Etc . In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, the Company shall have delivered to the Holder written notice thereof not less than 10 days’ prior thereto and proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4.

cash, where applicable) receivable by the Holders of the Warrant will be delivered to Holder or the Trustee as contemplated by Section 3.2.

4. Extraordinary Events Regarding Common Stock . In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise.

5. Certificate as to Adjustments . In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof).

6. Reservation of Stock Issuable on Exercise of Warrant . The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant.

7. Investment Representations . In connection with the Holder’s acquisition of this Warrant, the Holder hereby represents and warrants to the Company as follows:

(a) The Holder is acquiring this Warrant for its own account for investment only, and not with a view to, or for sale in connection with, any distribution of this Warrant in

violation of the Securities Act of 1933, as amended (the “ Securities Act ”), any rule or regulation under the Securities Act, or any state, foreign or other securities laws.

(b) The Holder acknowledges that an investment in this Warrant involves a high degree of risk.

(g) The Holder understands that the Company will be under no obligation to register this Warrant under the Securities Act (or any other applicable securities laws).

(h) The Holder is familiar with Securities and Exchange Commission Rule 144 and understands the resale limitations imposed thereby and by the Securities Act ; and

(i) The Holder is an “Accredited Investor” pursuant to Rule 501 of Regulation D under the Securities Act.

8. Assignment; Exchange of Warrant . Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a “ Transferor ”) in whole or in part. On the surrender for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B attached hereto (the “ Transferor Endorsement Form ”) and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, the provision of a legal opinion from the Transferor’s counsel (at the Company’s expense) that such transfer is exempt from the registration requirements of applicable securities laws, and with payment by the Transferor of any applicable transfer taxes) will issue and deliver

to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a “ Transferee ”), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor.

9. Replacement of Warrant . On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.

10. Maximum Exercise . In no event shall the Holder be entitled to exercise this Warrant with respect to any shares of Common Stock or shall the Company have the obligation to issue any such shares to the extent that, after such exercise and issuance, the Holder would be deemed to be the beneficial owner of more than 4.99% of the outstanding shares of Common Stock. For purposes of this Section, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. Notwithstanding the foregoing, the restriction described in this Section 10 may be revoked upon 75 days prior notice from the Holder to the Company or immediately upon notice upon an Event of Default under the Convertible Note.

11. Warrant Agent . The Company may, by written notice to the each Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 8, and replacing this Warrant pursuant to Section 9, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

12. Transfer on the Company’s Books . Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.

13. Notices, Etc . All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company.

14. Governing Law . THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE ALWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT BY ANY PARTY AGAINST ANOTHER CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS WARRANT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK IN EACH CASE SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN. ALL PARTIES AND THE INDIVIDUALS EXECUTING THIS WARRANT

ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS WARRANT DELIVERED IN CONNECTION HEREWITH IS INVALID OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS WARRANT.

15. Miscellaneous . This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party.

IN WITNESS WHEREOF, each of the undersigned has executed this Warrant as of the date first written above.

			BIO-KEY INTERNATIONAL, INC.

			By:
			Name:
			Title:


Acknowledged and agreed:

THE SHAAR FUND, LTD.

By: SS&C Fund Services N.V.

By:
Name:
Title:

EXHIBIT A

FORM OF SUBSCRIPTION

(To Be Signed Only On Exercise Of Warrant)

TO: BIO-key International, Inc.

Attention: Chief Financial Officer

The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ), hereby irrevocably elects to purchase (check applicable box):

o	shares of the Common Stock covered by such Warrant; or

o	the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2.

The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $ . Such payment takes the form of (check applicable box or boxes):

o	$ in lawful money of the United States; and/or

o	the cancellation of such portion of the attached Warrant as is exercisable for a total of shares of Common Stock (using a Fair Market Value of $ per share for purposes of this calculation); and/or

o	the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2.2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2; and/or

o	the application of $ in respect of the annual installment of principal or accrued interest owing under the Convertible Note.

The undersigned requests that the certificates for such shares be issued in the name of, and delivered to whose address is .

A-1

Dated:
			(Signature must conform to name of holder as specified on the face of the Warrant)
			Address:

EXHIBIT B

FORM OF TRANSFEROR ENDORSEMENT

(To Be Signed Only On Transfer Of Warrant)

Dated:
				(Signature must conform to name of holder as specified on the face of the Warrant)
				Address:


				SIGNED IN THE PRESENCE OF:


				(Name)

ACCEPTED AND AGREED:
[TRANSFEREE]


(Name)

B-1

Exhibit 10.89

Right to Purchase up to 250,000 Shares of Common Stock of
BIO-key International, Inc.
(subject to adjustment as provided herein)

COMMON STOCK PURCHASE WARRANT

No. W-09-2

Issue Date: December 28, 2009

BIO-KEY INTERNATIONAL, INC., a corporation organized under the laws of the State of Delaware (“ BIO-key ”), hereby certifies that, for value received, THOMAS J. COLATOSTI, or assigns (the “ Holder ”), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business the fifth anniversary of the date hereof (the “ Expiration Date ”), up to Two Hundred Fifty Thousand (250,000) fully paid and nonassessable shares (the “ Initial Number ” of Warrant Shares) of Common Stock (as defined below) at the Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the Exercise Price per share are subject to adjustment as provided herein.

As used herein the following terms, unless the context otherwise requires, have the following respective meanings:

(a) The term “ Company ” shall include BIO-key and any corporation which shall succeed, or assume the obligations of, BIO-key hereunder.

(d) The term “ Exercise Price ” means $0.30 per share, as adjusted from time to time as provided herein.

1. Exercise of Warrant .

2. Procedure for Exercise .

(a) If the Company’s Common Stock is traded on the NYSE Amex Equities exchange or another national exchange or is quoted on the Global or Capital Market of The

NASDAQ Stock Market, Inc.(“ Nasdaq ”), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date.

X = Y (A-B)

Where X =

the number of shares of Common Stock to be issued to the Holder

Y =	the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation)

A =	the Fair Market Value of one share of the Company’s Common Stock (at the date of such calculation)

B =	Exercise Price (as adjusted to the date of such calculation)