ATTORNEY/CLIENT PRIVILEGED COMMUNICATION
To: John T. Hentrick, Esquire
From: Steven H. Grant
Re: Senior Executive Performance
Date: January 25, 1998

Shown below is additional information which taken together with the information provided by Michael Tinsley by separate letter (dated January 23, 1998), serves as my basis to recommend the immediate termination of employment for Denise Licciardi and Jerry Gentile.

Inventory Issues:

Without duplicating the events described in the Michael Tinsley letter, I have initially summarized the following information to put my additional thoughts in the proper context.

On Thursday, December 31, 1997, final production was completed and 579 units were delivered to the Tampa, Florida warehouse of Cortina, Inc. (the company's newly appointed "freight forwarder). Shipping documents internally suggest arrival on January 1, 1998 while our internal log maintained at the manufacturing facilty indicates shipment on December 31, 1997. For your additinal information, the company's principal contact is an employee named Roger Bouws and Michael Tinsley is the principal point of contact for the company.

As a precaution against theft, fraud or abuse at the warehouse of the freight forwarder, I instruct Michael Tinsley to make periodic visits (announced or unannounced) to the Tampa warehouse to ascertain that the correct units were present, safe and secure. Based on this request, he confirmed on Friday, January 2, 1998, that all 579 units were in the warehouse. Of the 579 units, 308 were specifically identified as units sold for delivery to a customer named Pan Pacific.

Also on Friday, January 2, 1998, I attend the planning meeting at the manufacturing facility to independently determine the condition of the raw materials, work-in-process, and finished goods inventories. I believe that Tom Williams and Vince Bourne were present at this meeting with members from the Treasury Division. While all of the inventory team members were reviewing the procedures for the inventory scheduled for Monday, January 5, 1998 in the front conference room, I excuse myself and walk around the facility noticing that the facility is in disarray with open box cartons and other garbage lying around. I did not enter th stock room where the parts inventory is kept since th door is closed and I presumed locked. I find no work-in-process inventory on the work benches, as well as no finished goods on the loading dock. I then leave the facility and head back to our corporate office arriving probably around 9:00-9:30 AM.

As a result of the calendar this year, we specifically scheduled the physical inventory for the "first real workday of the 1998" which happened to be Monday, January 5th. As Michael later informed, the actual physical inventory was completed without incident in the presence of Coopers and Lybrand. As I recall, Denise and Jerry requested on January 6, 1998, the return of the Pac Pacific units sometime in the middle of the afternoon in order to complete any final upgrades or testing before shipment to Pac Pacific. In fact, Denise and Jerry were very adamant about receiving these units "no matter what time" on January 6th.

The primary reason that Denise requested that Michael or I return the inventory was that management adopted a policy on safeguarding the finished goods inventory which was "once the units left the manufacturing facility, Michael and I were the only employees authorized to order further movement of the units held by Cortina, Inc."

Obviously, Michael and I questioned the need for the immediate delivery since we could not understand what upgrades or final test could possibly be completed on 308 units if they arrived late in the evening, not to mention the stress we could put on the company's "new relationship" with the freight forwarder by requiring him to work his small staff of 6 employees until all the units were delivered that night. However after discussing the issue, Michael proceeded to authorize the return of the units to manufacturing but later that evening the freight forwarder ran into problems identifiying the specific units to be returned, which obviously angered Denise and Jerry. As Michael relayed to me, Denise wanted to rectify the situation immediately by requesting the location of the freight forwarder so she and Jerry could specifically identify these 308 units and have them sent over immediately. Furthermore, they indicated that they could not understand why this was taking so long since the inventory was clearly marked on the pallets and they could find it very quickly.

In fact, the following morning (Wednesday, January 7, 1998) Denise and Jerry went over to the Cortina warehouse to identify the units. Additionally, since we did not want for this situation to reoccur, an additinal procedure was immediately implemented that resulted in Denise and Jerry identifying the remaining customer specific units on each of the pallets. While I offered Michael's assistance in this matter, Jerry and Denise declined, indicating that it would only take them a few minutes since they were very familiar with the pallets, and I believe they were actually gone several hours. Later on when I inquired with Dneise, on why an alternative like "taking a smaller delivery that evening was not sufficient" she indicated that "Michael and I were interfering with production issues, and that she and Jerry needed the entire inventory back that evening so they would not waste manufacturing employees time upon arrival the next morning by having the units in the already in the proper areas of the manufacturing facility."

While I would describe her tone as defensive, I'm sure here comments were meant to intimidate me and others who interfered with production. In fact, Jerry and Denise had continually indicated that they were having problems with manufacturing the last few weeks and I'm suer they were directing their commentary at the supervisory personnel of manufacturing named Tom Williams and Vince Bourne.

(In order to provide the proper time sequence of events, I have inserted a brief description of the Q-1 Technologies vendor dispute so you can understand the chronological order of events and the underlying linkage with the "Inventory Issues.")

The Q-1 Invoice On Monday, January 19, 1998, I was traveling with Seth Joseph to the Board meeting in New York when upon arrival at Laguardia we took a limosine where I used my cellular phone to check my voice mail. My voice mail included a call from Q-1 Technologies that was a continuation of an ongoing series of phone calls between me and their management including Mike Galinski, Joe Usarski, and R. S. Rogers over non-payment of the invoice of over $208,000. Since I was traveling, I forwarded this voice mail to Mary asking her to return the call to Q-1 and tell them I would check up on their information. I also asked Mary to review this additional information since she was very familiar with this vendor. However, before I describe the contents of my voice mail from Q-1 I need to provide some additional chronological background information.

This vendor dispute was passed forward to me in late December 1997 or early January 1998 by Jerry on a phone call indicating that I should expect a call from Q-1 over the disputed invoice and where he quickly described "how inefficient the production process was when using the Q-1 boards, complaining that they constantly needed reworking, and they were (I assume him and Denise who were running production) tired of wating time with these defective boards." Based on this conversation, it was my understanding that it was unlikely the company would ever want to pay for them and Denise and Jery no longer wanted to deal with this situation.

Upon review of the Q-1 claim with Mary Ward, I isolated the dispute down from three issues (i.e., the cancelled purchase order and switch to new vendor named MC Test: the purchase of the remaining Q-1 inventory which transferred to MC Test, and the outstanding invoices for completed boards) to the completed board issue. Mary and I also discussed the merits of our position as postured by Denise and Jerry to me, and we reviewed the supporting written documentation for the outstanding payable, and we concluded non-payment was probably not the appropriate position since we still had a warranty claim. While I certainly acknowledge that I am not a legal expert in these matters, it is my opinion that if the boards were defective, the warranty provision would be the first recourse as it was articulated by Q-1 directly to me. Mary and I also discussed whether she knew if the boards were defective or not, and whether she had any idea where the "defective" boards may be located. Mary did not know where the baords were but she suspected the boards were probably just fine. On a follow-up call with the vendor during the week ending January 17, 1998, I indicated that I had isolated the disputed issue to the "board issue" but I could not guarantee payment at this time, since I had contradictory information indicating that the boards were defective (i.e., Denise/Jerry claiming "defective," and missing boards that I suspected were good and placed in units.)

Obviously, the vendor could not believe the boards were defective and the voice mail he left me on January 19, 1998 mentioned earlier stated "that he personally verified the status of the boards with Tom Williams who indicated that they were not defective and Q-1 wanted to be paid the amount due or they would sue for collection."

As you can see from my prior comments, this information regarding the "defective" nature was given to me weeks ago when Jerry gave me the information that the vendor will be calling me. I strongly suspect that Denise and Jerry found it very easy to blame this vendor and manufacturing supervisory personnel like Tom Williams and Vince Bourne for the overall production problems that were allegedly occuring.

(Now that I have provided this information, I am now returning to the Inventory Issues that I interrupted on Page 2.)

Inventory Issues - Continued

Directly upon my arrival to the office on Tuesday morning January 20, 1998, I met with Mary and Michael to discuss the Q-1 and the Pac Pacific issues. In this meeting, I directed Mary Ward to go over to manufacturing to find the Q-1 boards, since I assume if they were defective the boards would be isolated. With regard to Pac Pacific, Michael and I both realized that we now needed to count the 208 units for Pac Pacific inventory as finished goods (which we believed had been returned to Tampa since it was now 15 days later), and it would be easy to give Andy McAdams comfort that they were completed units since he could count 208 boxes and spot check by opening cartons to confirm its existence. Not to mention that the shipping documents we used with Cortina confirmed the date the items were received at their warehouse, describe the weight, number of units shipped, and contain a verifiable shipping log number identifying the number units earmarked for each customer.

One key point to mention, is the policy on the freight forwarder requires "the production people to call Cortina for pick-up at the manufacturing facility and delivery to Tampa pending final shipping instructions from Michael and I, since we have little knowledge of when a unit is ready to be sent back to the freight forwarder for further delivery instructions to the customer." In other words, Treasury safeguard the inventory at the freight forwarder but does not control inventory at the manufacturing facility.

In this context, as I was leaving for lunch on Tuesday, January 20, 1998, Denise reminded Dr. Zwan and I that the units were in St. Petersburg at the manufacturing facility. While I was pleasantly surprised that they were at manufacturing: Denise implied I should have realized that they were there since Michael and I authorized there [sic] movement back to the St. Petersburg facility 15 days earlier. Since the policy highlighted above does not require Michael and I to authorize the pick-up and transfer fo units into the Corina facility, I still needed to understand the condition of the units. As a result, I explained to Denise in the presence of Dr. Zwan and Seth Joseph that the condition of the units was very important to understand so I could explain the inventory issue to our Audit Partner, Andy McAdams. After a few minutes of questioning, Denise explained that all units were out of the boxes and in different stages and places of the manufacturing facility. While Denise was aware or not, the Treasury Division staff and I were already aware of a serial number discrepency regarding the 308 units.

Since Mary was already present at the manufacturing facility researching the Q-1 issue, we also asked her to highlight the condition of the 308 units for the Pac Pacific order for inventory purposes. Quickly Mary realized that only 285 units were accounted for from this order at the manufacturing facility and that 23 units were missing.

What quickly became apparent was that 308 units went over on December 31, 1997: that 308 units came back on January 6, 1998; and on January 20, 1998 only 285 units were accounted for. Apparently Tom Williams indicated that 23 complete units for the order were coming from brand new units that were being returned from customers.

Later on the afternoon of January 20, 1998, Denise called me from manufacturing and demanded to understand why Mary was over at the facility asking questions about the Pac Pacific order. She also stated "that if there was a problem it would be much easier to ask someone that knew about it and that it was totally inappropriate to send her over with out letting anybody know." She also indicated that "Mary was not trustworthy and that her husband said awful things about the company." She also inquired if "Bryan was aware that Mary was at the manufacturing facility." My reaction to Denise was "Mary was there all day on another issue at my direction when she (Denise) told me that the Pac Pacific inventory was still over there: that if there was a trust issue regarding her then please explain it, but her husband was not an employee any longer; and with respect to Bryan, she could feel free to let him know that Mary was there or I would be happy to tell him." From my perspective, she serves as the Vice President of Administration and is responsible for Human Resources, and I find her remarks regarding Mary Ward as slanderous with no basis in fact, and the whole tone of the conversation as an intimidation tactic directed at me especially with respect to Dr. Zwan's understanding of Mary's presence at manufacturing. Incidentally, Denise has held up a raise for Mary recently on the basis of her receiving a promotion or raise already this year.

As you know, when you arrived on Thursday, January 22, 1998, the company had clarified the financial impact of the restatement except for a pending issue related to the reconciliation of the book inventory at December 31, 1997, and the physical inventory of January 5, 1998 of approximately $600,000. The Treasury Division staff quickly identified about $200,000 of the problem by mid-day but the remaining $400,000 had yet to be clarified. Well obviously, the next question to fully understand was if 23 returned units were to be added with the 285 units on the floor; what really went over to Tampa in those 23 boxes on December 31, 1997?

As a result of this potential financial impact on the financial statements I demanded that Dr. Zwan be present when I asked Denise about this issue. In the presence of Dr. Zwan, Michael Tinsley, Mary Ward and myself she reluctantly admitted that the 23 boxes shipped on December 31, 1997 contained materials for complete units which of course weighed 25 pounds like a normal unit in a box. In other words, this inventory was not counted as raw materials on January 5, 1998 since it wasn't in the warehouse and its value when added to the Q-1 boards which are obviously fine and in units with an approximate value of $400,000.

As a follow-up to this issue, Denise called me on Friday, January 23, 1998 from New Jersey to inform me that she wanted to speak to me again to clarify this issue since it was really important to senior management and Mary Ward and Michael Tinsley did not need to really hear her answer. I put her off until Monday because in my mind she already admitted that she defrauded all of those around her.

Insider Trading Incidentally, I received a call from Tom Enstice a broker from Dean Witter on Friday, January 23, 1998 about pending margin calls from the price collapse for 8 employees who were frozen out from completing an option exercise in December when the window for exercise closed earlier that the previous published rules described. Of the 8 people effected, three are Form 4 filers including Denise Licciardi and her husband Sam Licciardi. Tom also informed me that two days prior that Denise sold some stock. I can't say with certainty she had an involuntary margin call but I can tell you with certainty she did not mention the transaction to me. Not to mention, that Denise has been intimately involved in the sales cycle, production cycle and all corporate administrative issues this quarter.

Denise and Jerry also allegedly told Tom Williams about the "anonymous letter" that the company had received about 10 days ago. Certainly, both Denise and Jerry should know better than to share this information.

Summary In my view, Denise and Jerry have run pretty reckless for long time. Ask yourself the following questions:

How could the manufacturing facility be messy on January 2, 1998 if Tom Williams told Michael he left it spotless on December 31, 1997?

How could the Q-1 boards be defective if they are not at the manufacturing facility and presumably in units?

Why was it so important for Jerry and Denise to have the Pac Pacific units back late at night on January 6, 1998 for upgrades at whatever time necessary?

Why is it that Denise and Jerry did not want our assistance in retrieving the 308 units from Tampa and to identify the remaining units on the pallets?

Could it be that Jerry and Denise did not want Tom Williams or other supervisory personnel to see the 23 partially assembled units returned from Tampa put back in raw materials or work-in- process inventory?

Why would Denise and Jerry be angry with Michael and I for not understanding why the Pac Pacific inventory needed to be returned on January 6, 1998?

Why would they state that we were interfering with production issues we know very little about?

Why would Denise and Jerry "pass the buck" on dealing with Q-1 vendor problem?

Why is it that Denise resisted telling me the condition of the 208 units in manufacturing facility?

Why is it that when Denise was confronted in front of Bryan, Michael, Mary and myself on Friday she finally admitted that the 23 units were full of parts that had not been counted but were sent over to Tampa on December 31, 1997?

Wouldn't it have been okay to recognize that the 23 returns from customers would be added to the 285 units when they were returned?

Was it really that important to send these 23 boxes to Cortina on December 31, 1997?

Why would Denise ask unprofessionally with me on the telephone when she realized Mary was at the warehouse on January 20, 1998?

I think this information proves its point!