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Development, License And Distribution Agreement

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DEVELOPMENT, LICENSE AND DISTRIBUTION AGREEMENT


This Development, License and Distribution Agreement (the "Agreement"), effective as of the date written below in the signature section (the "Effective Date"), is entered into by and between MTI Technology Corporation, a Delaware Corporation with principal offices at 4095 E. La Palma Avenue Anaheim, CA 92807 ("MTI"), and FalconStor, Inc., a Delaware corporation with principal offices at 125 Baylis Road Melville, NY 11747 ("FalconStor").


WHEREAS FalconStor designs, develops and licenses a line of computer software as fully described on Exhibit A annexed hereto and made a part hereof (the object code version of which, together with all enhancements, revisions, versions, modifications, demonstration versions and regardless of the hardware platform(s) used, is referred to herein as the "Software";


WHEREAS MTI desires FalconStor to modify the Software to MTI's specifications and desires to license and distribute the Software, as modified and bundled with MTI's software and/or other third party products, to third parties: and


WHEREAS FalconStor agrees to modify the Software to MTI's specifications and to grant the license to the Software, as modified, for distribution to accordance with the terms and conditions set forth in this Agreement.


NOW, THEREFORE, in consideration of the mutual promises and conditions contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, FalconStor and MTI agree as follows:


AGREEMENT


1. DEVELOPMENT.


1.1 Services. FalconStor hereby agrees during the term of this Agreement to use best efforts to modify the Software ("Modified Software") in accordance with the "Specifications" and the "Schedule," each set forth on Exhibit B for the benefit of MTI ("Services"). FalconStor shall perform all Services in compliance with applicable laws and the highest industry standards and shall deliver each "Deliverable" (as set forth in Exhibit B) by the date indicated on the Schedule for each Deliverable. FalconStor will not include or incorporate within the Modified Software any third party works without MTI's prior written consent. As part of the Services, FalconStor shall assist MTI in qualifying integrating FC device drivers, and work together to allow MTI to customize GUI/CLI.


1.2 Relationship Managers. Each party will assign a relationship manager to coordinate/execute business matters between the parties during the term of this Agreement. MTI


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and FalconStor Shall Meet Quarterly, Commencing On The Effective Date of this Agreement, To exchange technology information and updates that may affect the other party's product.


1.3 Obligations of MTI. MTI shall supply components stated in the project milestones set forth in Exhibit B and provide development environment (project-specific hardware and software) and access to the MTI development/certification organization, via phone and/or e-mail, as required to complete the Services. MTI will cooperate with FalconStor in testing the Software on the computer onto which the Software will be installed pursuant to this Agreement (each computer onto which the Software is installed will be referred to herein as a "Computer"). MTI shall provide to FalconStor, for a reasonable period, its loan equipment to FalconStor for product testing and a sample of each of its computer configurations onto which it intends to copy the Software, to ensure proper functioning of the Software in conjunction with Computers. FalconStor shall have the right to reject those configurations on which the Software does not function properly, provided that FalconStor will reasonably cooperate with MTI to determine if modifications are feasible to the Software and/or the Computers to resolve the nonfunctionality. Prior to general shipment, MTI shall provide to FalconStor a sample of each new Computer (with the Software installed) for a period of ninety (90) days to enable FalconStor to test the Software as installed on the Computer. After the ninety (90) day period has expired, FalconStor will either return the Computer or purchase it, at cost, at FalconStor's option. When MTI develops or offers to consumers a new hard drive which is or will be available in Computers (rather than a new machine), MTI will supply FalconStor with a sample of the new hard drive as soon as it is available, to enable FalconStor to test the Software on the new hard drive. After the ninety (90) day period has expired, FalconStor will either return the hard drive or purchase it, at cost, at FalconStor's option.


1.4 Delivery. FalconStor shall deliver to MTI any and all Deliverables due on such delivery date on or before each delivery date set forth in the Schedule. FalconStor shall provide to MTI one or more master disk(s) of all Deliverables (each a "Master Disk"), which shall include the most current release of the Software, to be used by MTI for hard disk installation of the Software under Section 2.1 below. FalconStor shall have the right, in its sole discretion, at any time, to modify any technical specifications or other technical matters relating to the installation and/or operation of the Software, including the hardware requirements for Computers, or other technical specifications or matters relating to the Software that affect the operation of the Software on Computers. FalconStor shall provide on a Master Disk to MTI end-user documentation (the "Documentation") with each Software. The Documentation shall inform the end-user regarding access to, and use of the Software. FalconStor may provide MTI end-user inserts ("Inserts") for inclusion with each Computer, containing information regarding access to the Software. MTI shall include a copy of the Insert, if provided by FalconStor, with its related Software.


1.5 Review of Deliverable. For software code Deliverables, MTI shall evaluate each Deliverable and shall submit a written acceptance or rejection to FalconStor within sixty (60)


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days after receipt of the Deliverable. Acceptance shall be in writing. If MTI identifies errors in a Deliverable prior to acceptance, then FalconStor shall correct such errors within sixty (60) days following receipt of notice thereof during acceptance testing of each Deliverable. MTI shall also evaluate the Documentation, and in the event the Documentation requires corrections or fails to meet the specifications, as determined by MTI in its sole and reasonable discretion, MTI shall specify the corrections needed, and FalconStor shall deliver an amended version of such Documentation within five (5) business days. Once MTI accepts the Software, MTI, in its sole and absolute discretion, shall have the option of either (i) installing the Software directly on a Computer and shipping the Computer to end users; or (ii) shipping the hard disk containing the Software, replicated by MTI at its costs to the end user and installing the Software at the end user's premises.


1.6 Failure to Deliver. If FalconStor fails to deliver any Deliverable by the delivery date, or if any errors discovered before acceptance cannot be eliminated within the time period set forth in Section 1.5 hereof, then MTI may, at its option: (i) terminate the Agreement and retain the Deliverable (including any applicable Documentation); or (ii) extend the correction period in its sole and absolute discretion.


1.7 FalconStor's Support Obligations. If at any time or times subsequent to the approval of any Deliverables pursuant to Section 1.5, MTI identifies any material bugs with respect to any Deliverables or any material bugs with respect to any Deliverables are brought to the attention of MTI, FalconStor shall, at no cost to MTI, promptly correct any such material bugs to MTI's reasonable satisfaction. For no additional training fees, FalconStor shall provide a minimum of three (3) full business days of training in the use of the Software and in providing end-user support for the Software to persons designated by MTI. During the training period, any of the out-of-pocket expenses, travel and production cost (e.g. telephone and faxes) will be mutually agreed beforehand and then be billed separately. In addition, FalconStor shall make available its telephone and e-mail maintenance and support services on a twenty-four (24) hours, seven (7) days a week basis. The details of the maintenance and support services provided by FalconStor is set forth in more detail on Exhibit D.


2. LICENSE GRANT. Subject to the terms and conditions contained herein, FalconStor hereby grants to MTI, and MTI hereby accepts from FalconStor during the term of this Agreement, a non-exclusive, non-transferable, revocable, license ("License"):


2.1 to use, copy, edit, format, modify, translate, make and have made and create derivative works from the Software and the Modified Software;


2.2 to reproduce, license, rent, lease, install on Computers, export or otherwise distribute, and have reproduced, licensed, rented, leased, installed on Computers, exported or otherwise distributed, to and by third parties, the Software, the Modified Software and the Documentation;


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2.3 to OEM and bundle the Software, the Modified Software and Documentation in conjunction with MTI's products and/or third party products; and


2.4 to grant the rights set forth in Sections 2.2 and 2.3 to "Third Party Distributors." "Third Party Distributor" shall mean any entity that has the right, pursuant to an agreement with MTI that complies with and is consistent with the applicable terms and conditions of this Agreement, to distribute the Software to end users. The terms and conditions stated in this Agreement shall apply to all sublicenses made hereunder during the term of this Agreement.


3. RESTRICTIONS. MTI agrees that the license granted in Section 2 does not permit MTI to use, copy, modify or reproduce, distribute, or make available the Software or any other material provided or licensed hereunder except as expressly provided in Section 2. MTI shall not decompile, disassemble, or reverse engineer the Software. Nothing in this Agreement shall prevent MTI from selling computers without the Software or from selling software which compete directly with the Software.


4. EXPORT RESTRICTIONS. MTI acknowledges that the laws and regulations of the United States may restrict the export and re-export of the Software. MTI agrees that it will not export or re-export the Software in any form without the appropriate United States or foreign government licenses. If MTI exports the Software from the United States, MTI shall indemnify and hold FalconStor harmless from and against any duties, penalties or other claims arising out of or relating to such exportation or importation.


5. ESCROW.


5.1 Escrow Materials. Within fourteen (14) days after MTI's acceptance of the Deliverables, FalconStor shall deposit in escrow the source code for all Software and Modified Software (and any updates thereto), an electronic copy of all Documentation, and any other documents or materials required to write, support, test and manufacture the latest version of the Software ("Escrow Materials").


5.2 Escrow Release. If during the term of this Agreement, FalconStor refuses or is unable to abide by the terms and conditions of this Agreement for any reason whatsoever (including, but not limited to, FalconStor's bankruptcy, termination of FalconStor's business, assignment of this Agreement or "Force Majeure Event" (as defined in Section 14 below) or if MTI terminates this Agreement for cause (each a "Triggering Event" as further defined below), MTI shall send written notice demanding that FalconStor or any surviving entity to abide by the Agreement. If MTI's demand is not met within thirty (30) days, MTI's right to access Escrow Materials shall be triggered. For purposes of this Section, neither FalconStor nor any entity that assumes the rights or obligations of FalconStor, may terminate this Agreement (absent a material breach by MTI) in order to cut short the term of this Agreement. For the purposes of this


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Section, a Triggering Event shall include, without limitation, failure to give MTI access to upgrades and enhancements or institution of unreasonable price increases by FalconStor. The use of source codes can only be used for the "Deliverable" in exhibit B and "License" in the Section 2 in this agreement.


5.3 License. If MTI's right to access Escrow Materials is triggered, MTI shall have a nonexclusive, non-transferable right and license for a period of three (3) years from the date of MTI's receipt of Escrow Materials, to use, copy, edit, format, modify, translate, make and have made, and create derivative works of the source code of the Software and Modified Software, provided that MTI manages such actions in a confidential manner. During this period, MTI is obligated for royalty payment per this Agreement


5.4 Return of Escrow Materials. If after MTI's escrow rights are triggered FalconStor resumes performance under this Agreement, MTI's escrow rights shall be terminated and MTI shall immediately return to escrow all applicable Escrow Materials.


Escrow Agent. The parties shall agree upon an escrow agent. MTI shall bear the cost of the escrow agent and related reasonable costs incurred by FalconStor.


6. MARKETING EFFORTS. MTI shall use commercially reasonable efforts to market and promote the Software through advertising, point-of-sale and online promotions, sales literature and brochures, co-marketing opportunities, including customer service and online forums, and such other promotions as MTI shall deem appropriate in furtherance of its responsibilities under this Agreement in its sole and absolute discretion. FalconStor will reimburse MTI a maximum of MDF of S 20,000 upon the pre-approval marketing activities by FalconStor.


7. PAYMENT.


7.1 Purchase Fee. MTI will pay FalconStor the fees set forth for each Software product on Exhibit C (including the applicable discount) ("Purchase Fee") and will purchase the minimum number of Software set forth in Exhibit C for each year ("Minimum Purchase Requirement"). In the event MTI fails to make the Minimum Purchase Requirement in any given year, MTI will have the option to pay the difference to qualify the discounts set forth in Exhibit C. In the event MTI exceeds the Minimum Purchase Requirement in any given year, the amount sold in excess may be applied towards the Minimum Purchase Requirement in any of the following years. No Purchase Fee shall be due for copies of the Software: (i) used or distributed for demonstration, marketing or training purposes; (ii) distributed to an end user as a replacement for a defective copy or to fix an error; (iii) used to repair or maintain a end user's system in the event such end user does not have a back up or archival copy, (iv) used for backup or archival purposes; (v) returned by an end user; or (vi) used for manufacturing or testing purposes.


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7.2 Development Fee. MTI agrees to pay FalconStor the non-refundable and non-returnable "Development Fee" of fifty thousand U.S. Dollars (US$50,000) upon the execution of this agreement.


7.3 Payment. MTI shall pay FalconStor the royalty fee payment and Point of Sales (POS) report on a quarterly basis, within thirty (30) days of the end of each Quarter, which ends on or about January 31, April 30, July 31 and October 31. With the payment, MTI will include a written statement, net of returns, setting forth all information reasonably required by FalconStor to independently calculate the Purchase Fee payment. All payments shall be made in United States currency.


7.4 Taxes. FalconStor acknowledges and agrees that MTI has the right to withhold any applicable taxes from any payment due under this Agreement if required by any government agency. FalconStor shall be responsible for all taxes based on its income.


7.5 Audit. A nationally and/or USA recognized accounting organization retained by FalconStor and reasonably acceptable to MTI may have access to inspect MTI's compliance with this Agreement and to audit MTI's books and records related to this Agreement to determine that Purchase Fee payments paid to FalconStor are correct. Such audit may only take place upon sixty (60) days written notice, during regular business hours and no more than once per calendar year. Only two (2) years of MTI records immediately preceding the date of the audit may be accessed from the date of audit, and MTI is only required to maintain records for a two (2) year period. All records accessed during the audit shall be deemed MTI's Confidential Information and will be treated as such in accordance with Section 9 of this Agreement. FalconStor shall pay for the entire cost of the audit.


8. OWNERSHIP AND PROPERTY RIGHTS. It is expressly understood and agreed that no title to, or ownership of, the Software provided on any Master Disk, or any part thereof, is hereby transferred to MTI, and that title thereto is and shall remain the property of FalconStor or its third-party suppliers, as applicable; and that all applicable copyrights, trade secrets, patents and other intellectual property rights in the Software and all other items licensed hereunder are and shall remain the property of FalconStor or its third-party suppliers, as applicable.


9. CONFIDENTIALITY.


9.1 Definition. Either party hereto may disclose to the other party certain information that the party deems confidential. As used in this Section 9, "Confidential Information" means all information, regardless of the form in which it is transmitted, relating to the disclosing party's business which, if disclosed in tangible or electronic form, bears a legend indicating that it is confidential information or if disclosed orally or visually only, is indicated as confidential or proprietary at the time of disclosure and is promptly thereafter identified in a non-confidential memorandum to the receiving party.


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9.2 Non-disclosure. For a period of three (3) years from the date of disclosure, the receiving party shall not disclose any Confidential Information it receives from the disclosing party to any person, firm or corporation except to: (a) employees of the receiving party and employees of its affiliated companies who have a need to know and who have been informed of the confidentiality obligations hereunder; and (b) contractors or consultants under contract to the receiving party who have a need to know, who have been informed of the receiving party's obligations hereunder, and who have agreed in writing not to disclose Confidential Information for a period not shorter than the nondisclosure period provided abo
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