[handwritten on top of first page - STEVE GRANT- CFO]

[excerpt begins at page 734]

CONFIDENTIAL

A. In December of '97 Denise passed the vendor dispute to me saying that there were problems with the boards.

Q. And in January of 1998 when you're dealing with this vendor you were not able to find those boards?

A. In January '98 on the 19th when the vendor left me a voice mail and said, the boards were good, Tom Williams knows it, I instantly put my staff on going to find the boards.

Q. That was on the 19th?

A. Yes.

Q. While you were up in New York?

A. When I arrived in New York I had a voice mail.

Q. Now, did there come a time when the PacPacific units that had been sent to the warehouse were brought back to manufacturing?

A. Yes.

Q. In January. And do you recall when that happened?

A. I believe it was January 6th.

Q. Okay. So the day after the physical inventory?

A. Uh-huh.

Q. And who brought them back, who brought those units back?

A. Denise and Jerry Gentile requested them to be returned to manufacturing.

Q. Now, what was your understanding if those had been sent to a warehouse for PacPacific why they were coming back to manufacturing on the 6th?

A. My understanding was that they wanted to do final test on the unit before they sent them to the customer.

Q. Were they supposed to do anything other than final tests?

A. Not that I'm aware of.

Q. Did you have any knowledge on January 6th that any of those units were actually incomplete?

A. I don't think so.

Q. In your view would it have been a problem to do some actual tests on the PacPacific units if you were going to be selling them as of Q4 to be doing additional tests in January?

A. In my view it didn't matter what we were going to do with the units at that point in time. Because there was no way it was going to pass the smell test.

Q. So you basically, whatever they were going to do with it?

A. Yeah. For revenue recognition purposes.

Q. But at least your understanding was that all that needed to be done was some final tests?

A. On January 6th, yes.

Q. Now, how many units had gone over to the warehouse, supposedly, on December 31st?

A. 308.

Q. To your knowledge how many units came back on January 6th?

A. 308.

Q. At some point were you told that they couldn't find 308 units back in the manufacturing facility?

A. On January 19th, after getting word from Q1 Technologies that there was -- that the boards were good and Tom Williams was aware of it, I directed Mary Ward to go over and figure out where were the boards and what was the status of the units. She determined on January 20th that there were only 285 units.

Q. Only 285 units?

A. Yes.

Q. And so we're missing about 23 units?

A. That's correct. Or 23 units could not be accounted for.

Q. Could not be accounted for, okay. Now, on January 22nd or January 23rd, did you have a discussion with Denise Licciardi concerning those 23 unaccounted for units?

A. Yes.

Q. Tell me the circumstances of that.

A. It became quite clear to me that if the vendor was saying the boards were good and the boards were in units, then why was our position that the boards were no good.
So I confronted Denise in front of Mary Ward, Michael Tinsley and Bryan Zwan. And Denise admitted that at least 23 of the boxes had component parts in there. At the same time Mary Ward on the 20th had identified 70 units that were potentially component parts in boxes.

Q. I'm sorry?

A. That at least 70 units were not completed.

Q. I am going to show you what has been admitted in evidence as 336. Ask you if this is the report to which you're referring concerning the Mary Ward reporting to you?

A. Yes.

Q. And if you could look -- do you have one, Stan?

Arbitrator Beiley: I don't.

Ms. Skolnick: I'll give you mine.

BY MS. SKOLNICK:

Q. If you could look at the first paragraph, first bullet point and what does she indicate there?

A. I'm sorry, I think I said 71 were not completed. Only 71 were completed.

Q. Only 71 were completed?

A. Yes.

Q. Now, this is as of January 20th?

A. That's correct.

Q. And these were supposed to be the units that were complete as of December 31st?

A.Yes.

Q. Can you look through that exhibit. And she basically gives you a report, does she not, of the different status of all the units?

A. That is correct.

Q. And what was the status of all the units? 71 were complete and were the other in various stages of the manufacturing process?

A. Yes.

Q. Let me refer you, and if I can look over your shoulder, I apologize, I thought we had extra copies.

On page 6 of 7 of the first memo that's attached, which is Digital Joseph 006001, it says in the middle of the page: Units to be reworked, need new traveler.

What's a traveler?

A. When a unit goes on the manufacturing floor, it's kitted --

COURT REPORTER: What was that?

THE WITNESS: I'm sorry. When a unit is kitted, parts are assembled and put in a kit. Put in a box with what they call a kit. It starts with a document called a traveler form. And the form goes through various stages of manufacturing where parts are assembled and people sign off on them.

BY MS. SKOLNICK:

Q. What does that mean, "needs new traveler"?

A. I assume there was something wrong with the traveler form with regards to those specific units there. I couldn't tell you what was wrong with them.

Q. Okay.

How about vibe testing, do you know what vibe testing is?

A. There's a process where the unit goes through an environmental chamber where it gets tested for heat and coolness, subjected to environmental conditions including vibration testing.

Q. Do you know how that works, how long that takes?

A. I think the process is two or three hours long where the whole vibe testing goes on.

Q. Of course, if something doesn't pass vibe testing it could take a little longer?

A. Of course.

Q. what is "units in qual to go to burn in," which is at page 7 to page - 7 of 7?

A. I think that's where they actually turn on the unit and test it, go through a testing cycle just like a computer.

Q. And then there are some units that are, that don't have plastic, what's the plastic?

A. The unit is contained -- there are circuit boards within a metal chassis and a wrap around the metal chassis is a plastic container, sort of like a laptop computer, but about twice the thickness.

Q. So to have a completed unit it has to be in plastic, right?

A. Yes.

Q. What is units at unit assembly, which is on page 2 of 7?

A. I suspect that means it was at various spots in the manufacturing process where the technician was putting pieces together.

Q. Well, you received this from Mary Ward?

A. Yes.

Q. Did it concern you at that point that so many of these 308 units did not seem to be completed as of January 20th?

A. This was my secondary concern on that day. My first concern was -- actually my third concern. My first concern was finding out about where the Q1 boards were.

My second concern was getting my staff to prepare for the restatement. And since that already -- since the Board blessed this as a nonrevenue transaction, I was merely concerned about getting this back to inventory and about what state it would be in.

Q. You were beginning to say finished goods. Didn't you have to, in order to be able to do your financials, figure out what the status of these units were as of December 31, 1997?

A. It had to be classified to inventory total dollars. We hoped and I think we accomplished getting it between three categories in inventory: Raw materials, work in process or finished goods. A document like this helped us achieve that.

Q. Let me ask you this. For inventory there's different ways of valuing, isn't that fair? In other words, it depends on what stage the inventory is at how you value it as one of the assets of the company?

A. Yes.

Q. And so raw materials would be valued at the cost of the raw materials?

A. That is correct.

Q. It does not include any labor and it does not include any overhead, is that correct?

A. That is correct.

Q. Work in process would include some labor, it would include the raw materials, some labor and some overhead, depending on how far along the process it is?

A. Yes.

Q. Is that correct?

A. Yes.

Q. And finished goods are valued as the raw materials, the labor and the overhead?

A. Assuming that the unit is completed, yes.

Q. Assuming the unit is completed.

So in order to be able to do an accurate statement of your inventories, isn't it fair to say that you needed to know how many units were completed as of December 31st, and what stage the other units were in?

A. And that's what this report told us on January 20th.

Q. So this report told you that 71 were completed units?

A. Uh-huh.

Q. And that we're still missing here 23 units?

This report was before you talked to Denise Licciardi?

A. Yes.

Q. And so at 23, question mark. And then the remainder at least as of January 20th were in some stage of the process, is that correct?

MR. SULLIVAN: I'm sorry, where is the 23 question mark stated?

MS. SKOLNICK: On the third bullet point.

MR. SULLIVAN: Where is the question mark? I don't see it.

MS. SKOLNICK: Well, I was using it as a --

MR. SULLIVAN: It says that the 23 units are being returned from customers, is that what you're referring to?

MS. SKOLNICK: Yes. We don't know -- well, let me back up.

MR. SULLIVAN: I want to make sure you accurately reflect what the document says.

BY MS. SKOLNICK:

Q: If 23 boxes -- if 308 boxes had gone over on December 31st to the warehouse for PacPacific and you were only able to account for 285 units back at manufacturing, was there a question as to what was in the 23 boxes that are not at manufacturing?

MR. SULLIVAN: And are you asking this as of January 20th?

MS. SKOLNICK: Yes.

BY MS. SKOLNICK:

Q: Did you know what had been in those 23 boxes that had gone over to the warehouse and now you couldn't find the units for them on the 20th, did you know?

A. On the 22nd we determined the 23 boxes, at least 23 boxes contained raw materials.

Q. But on the 20th you didn't know?

A. On the 20th we had a report that raised issues about the 23 boxes.

Q. So there was a question concerning the 23 units?

A. Yes.

Q. And just to make clear that what we have here is that we've got, if you add 23 to 71, you have about 200 units that seem to be in some stage of the process?

MR. SULLIVAN: I'm going to object to that as vague and ambiguous.

ARBITRATOR BEILEY: I'll overrule it. If the witness doesn't understand it, then he can say he doesn't understand it.

THE WITNESS: I think the report indicates a vast majority of the units were not completed units.

MS. SKOLNICK: Okay. If we want to take a break, now I think would be a good time.

ARBITRATOR BEILEY: If we're moving away from 336 I think it's a perfect time. Let's take 10 minutes.

(A recess was taken.)

ARBITRATOR BEILEY: All right. It's 11:00 AM. We're back on the record. And please proceed.

BY MS. SKOLNICK:

Q. Steve, let me refer you to your confrontation with Denise. And I think you told us before who was present.

A. Yes.

Q. And she acknowledged in front of all of you, including Dr. Zwan, that 23 of the boxes that had gone over to the warehouse as part of the PacPacific deal contained just raw materials?

A. Yes.

Q: Is that correct?

A. At least.

Q. And did she acknowledge that those raw materials included those Q1 boards?

A. She did not. But we had already -- that was the reason we went over there on the 20th.

Q. When she admitted this, what was your reaction, that components had gone in boxes to a warehouse to be recorded as revenue?

A. Total disbelief.

Q. Why?

A. Well, I think you have to depend on management to have a certain standard of ethics and responsibility. And clearly that was a violation of what I thought good protocol or good conduct would be.

Q. Well, would you consider it to have been fraud if you had recognized that revenue?

MR. SULLIVAN: Objection. Incomplete hypothetical.

ARBITRATOR BEILEY: Overruled.

MR. SULLIVAN: If you had recognized the revenue.

THE WITNESS: Well, clearly it wasn't fraud because we didn't recognize the revenue. I believe you could possibly argue that it was kind of the basis for a fraudulent activity.

Clearly it was a fraud on me.

BY MS. SKOLNICK:

Q. It was a fraud on Michael Tinsley?

A. Yes.

Q. What was Tinsley's reaction?

A. Anger and disbelief as well.

Q. Did you in fact demand that Denise and Jerry be terminated immediately as a result of this?

A. I made a recommendation by the following Sunday that they should be terminated.

A. And let me give you a copy of what has been previously admitted as Exhibit 43.

Can you identify Exhibit 43?

A. this is a memorandum that I wrote, that I presented to Dr. Zwan on the -- the contents of it on Sunday, the 25th and sent to John Hentrich, outside counsel.

Q. Whose idea was it to actually send the memo to John Hentrich?

A. Seth Joseph.

Q. And I assume that you shared the contents of this memo with Seth during the weekend of the 25th?

A. Yes. He was present at the meeting on the 25th in Dr. Zwan's office.

Q. So would it be fair to say that on the 22nd you announced a restatement. Some time on either the 22nd or the 23rd you spoke with Denise and she admitted that those 23 units -- feel free to look at your notes.

A. I believe I confronted Denise on Thursday, January 22nd.

Q. And when you confronted Denise, was that before the board meeting or after the board meeting?

A. The board meeting, as I recall, broke into two -- basically adjourned at one point in time. And during that adjournment I think I talked with Denise.

Q. Did you come back and report to the board on the 22nd that Denise had admitted to putting components in boxes?

A. In the first part of the meeting we said we were -- this was the range that we were looking at, we were examining an inventory issue.

After the adjournment we talked to Denise and at the afternoon session, or the session that followed, we indicated that we had narrowed down the discrepancy significantly.

Q. But other than saying that the discrepancy had been narrowed down, did you expressly tell them that Denise had admitted that those 23 boxes contained raw materials?

A. Not on Thursday the 22nd.

Q. In fact, you didn't actually tell them until the 27th, right?

A. That is correct. That being the outside directors.

Q. The outside directors, right.

Well, when Denise admitted that she had done this, Bryan Zwan was there, right?

A. Yes.

Q. And you informed Seth Joseph of this admission?

A. Yes.

Q. Did he share your views that this was a terrible thing?

A. Yes.

Q. Now, I think you made mention of a meeting that you had on Sunday, the 25th?

A. Yes.

Q. And where was that meeting?

A. In Dr. Zwan's office of the company headquarters in downtown Clearwater.

Q. At whose request was that meeting held?

A. I think it was my request.

Q. Who was present at the meeting?

A. Dr. Zwan, Seth Joseph, Michael Tinsley and myself.

Q. I believe that you mentioned that you, during that meeting you went through the contents of Exhibit 43; is that correct, with Dr. Zwan?

A. I don't know if I -- I have to step back. I don't know if I rehashed all the contents of the memo. Clearly I talked about the 23 units which he was already aware of.

Q. Would it be fair to say that the purpose of this meeting was that in your view Dr. Zwan had to immediately terminate Denise Licciardi and Jerry Gentile?

A. Yes.

Q. Did Michael Tinsley share that view?

A. Yes.

Q. Did Seth Joseph share that view?

A. Yes.

Q. In the first paragraph of Exhibit 43 it says: "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 of Denise Licciardi and Jerry Gentile."

Had you seen a letter written by Michael Tinsley?

A. Yes.

Q. To John Hentrich.

And was the tone and substance of the letter similar to yours?

A. Yes.

Q. That he wanted the immediate termination of them?

A. I think so.

Q. Now, at the meeting that you had with Dr. Zwan in his offices, what was Dr. Zwan's reaction when you, Michael Tinsley and Seth Joseph told him that he needed to immediately terminate Denise Licciardi and Jerry Gentile?

A. I think he accepted that he needed to do that, but he was apprehensive about actually doing it. The meeting ended where he indicated he would take care of it the following morning.

Q. So it was your understanding when you left that he was going to take care of it, he was going to terminate her?

A. Yes.

Q. In fact, did you and your wife and Seth Joseph actually go out to dinner after that meeting?

A. I can't recall.

Q. But you left the meeting believing that Zwan was going to do the right thing?

A. Yes.

Q. During that meeting do you recall Dr. Zwan asking for a report?

A. Can you be more specific?

Q. Okay. Do you recall during the meeting Dr. Zwan asking Chris Gurney to contact Chuck Anderson and bring him a report?

A. Chuck Anderson brought a report. Unfortunately, I can't recall if Dr. Zwan made a call to Chris Gurney to ask Chuck Anderson to bring it.

Q. But you do recall Chuck Anderson bringing a report to Dr. Zwan?

A. Yes.

Q. Who is Chuck Anderson?

A. Chuck Anderson was an employee of the company that worked in the manufacturing process. I guess in the manufacturing domain, probably a mid level manager of the process.

Q. When he came in with the report, what did you see? Was it in an envelope, was it in a folder, was it in papers, what was it?

A. I can't recall how the report was presented to him, if it was in a folder or not.

Q. Now, in getting this report was this in the context of your discussions concerning the termination of Denise Licciardi?

A. I don't know what the report -- I did not know what the report was about at that point in time. We were talking about Denise Licciardi.

Q. You were talking about Denise and he requested the report while you were talking about Denise?

A. Yes.

Q. And that she needed to be terminated?

A. Yes.

Q. Do you recall that he called it a knowledge report?

A. I think so.

Q. Did you know what a knowledge report was on Saturday, January 25th?

A. No, I do not.

Q. Let me back up a little bit. The restatement was actually announced in the press release when?

THE WITNESS: What exhibit was it, I'm sorry?

MR. SULLIVAN: 75.

THE WITNESS: On Thursday, January 22nd.

BY MS. SKOLNICK:

Q. So that would have been Thursday, January 22nd. Did Digital stop trading on the 22nd?

A. I believe we asked for a trading halt in anticipation of a release on the 22nd.

Q. On the 23rd was there trading?

A. Yes.

Q. What happened to the stock?

A. Stock price collapsed, lost about 80 percent of its value, and hit record lows.

Q. During that day at the offices were you in fear?

A. I don't know about that day.

Q. Well, so on the 23rd you don't recall having any -- I'm sure that people were not happy, but do you recall having any fear on the 23rd?

A. I'm not sure that I had fear on the 23rd.

Q. Let's go back to the 26th. When did you arrive at the office on the 26th?

A. I would suggest probably between 8 and 9:00 AM, which is the normal time I would arrive at.

Q. Do you know if Dr. Zwan was meeting with Denise Licciardi when you came in?

A. I don't know if he was meeting with her when I came in, but he clearly was meeting with her that morning.

Q. Did you see her leave his office?

A. Dr. Zwan's office was next door to mine. I can't remember when and if she left.

Q. Well, do you recall seeing her very upset?

A. Yes.

Q. Tell me what the atmosphere was like in the office on the 26th.

A. The atmosphere became tense. Dr. Zwan, it became widely known very quickly that Dr. Zwan was terminating Denise, or trying to terminate her.

Q. How did it become widely known?

A. I suspect Denise told her husband and told Jerry Gentile and then the news travelled rather quickly.

Q. And so describe the tension that was felt.

A. Well, I think it was a blow -- first off, we had an initial blow of the restatement and the stock price closing. Then we had the secondary blow of certain members of management suggesting that Denise and some other people should be terminated. And I think that raised the level of tension like, what has taken place here? And it was just, you know, tension was rising.

Q. Were you in fear for your safety --

A. I was --

Q. On the 26th?

A. I don't know if it was the 26th or not. But I was clearly in fear of my safety for myself, my family, my fellow colleagues in the finance area and clearly the Josephs.

Q. Why were you in fear for your personal safety and the safety of your family and the other people you mentioned?

A. Well, I think there were really two elements, one was that there were some very, very angry shareholders and now there were some very, very angry Scientologists.

Q. Why were you afraid of angry Scientologists?

A. Well, you know, I didn't know at that point in time Denise's familial relationships, but clearly a prominent Scientologist with respect to a company was being asked to leave the company. And there were concerns about what that could mean to the company.

Q. Well, what did it mean to you that Scientologists were angry about Denise being asked to leave the company?

A. You know, you're pinpointing the 26th. I can't say the 26th was the date or the dates, but clearly, you know, there was a tension, people were walking around giving me dirty looks. My sense was that they were angry at Seth and myself, okay, among others. And I was very concerned about my safety.

Q. Was there anything about Scientology that made you concerned about your safety?

A. No.

Q. Why was Scientology even relevant to you?

A. Well, Dr. Zwan was a Scientologist. About 10 per cent of the employees were Scientologists. And Denise was a very high ranking executive of the company.

Q. Well, would it be any different if they were all Baptists? Why is it a concern that they were Scientologists?

A. I think there was a general concern that there would be -- they would be angry. And I think they walked around angry at non-Scientologists for a couple of days.

Q. In fact, you were so fearful for your safety that when you left on Monday, January 26th, you actually took all your personal photos of your family with you, did you not?

A. I had just brought them a few days prior. And yes, I did take them home.

Q. Why did you take home the pictures of your family?

A. I have five children, a wife, spread throughout the country, okay. And I was concerned about their safety. And a first wife, too, for that matter. I was concerned about the safety of myself and my family. I think it's a very common reaction.

Q. You didn't want the Scientologists to see pictures of your family?

A. I didn't want the Scientologists to see anything.

Q. On January 26th, do you recall a meeting about the Q1 boards?

A. I don't remember -- I remember having a face-to-face meeting with Q1. I don't recall it being on January 26th.

Q. Well, do you recall meeting with Tom Williams on January 26th?

A. Yes.

Q. Who is Tom Williams?

A. Tom Williams was the vice-president of manufacturing.

Q. Did he come into your office?

A. Yes.

Q. Did he tell you what had occurred -- well, what did he tell you?

A. By this time we had known that there was a book to physical problems, which we had resolved.

Q. Wait a minute, book to physical problem as to Q4, right?

A. As with respect to the end of the year inventory.

Q. As to the PacPacific?

A. As to --

Q. What would have been PacPacific?

A. No, I think it's just the company's book to physical records. PacPacific was clearly an issue.

We had resolved that to our satisfaction by the 22nd. We knew that Tom Williams was not present on December 31st, as the day ended. We knew that Tom Williams was apprehensive --

Q. I'm asking you what did he tell you, not what he didn't tell you. Not what you knew.

MR. SULLIVAN: Let him answer the question.

THE WITNESS: I'm getting to that point.

We knew that Tom Williams was apprehensive about the things that were going on in manufacturing. We knew that on the 20th or on the 19th Q1 was concerned about their nonpayment. We knew on the 20th that many of the units were not produced.

And on the 26th there was only one question left to be asked and that was: Did that behavior take place, that being raw materials stuffed in boxes, take place in the second or third quarter? And the answer was yes.

BY MS. SKOLNICK:

Okay. So my question is: Did Tom Williams tell you that this kind of activity, putting raw materials in boxes, occured in Q3?

A. Yes.

Q. Did he tell you that the 100 units for MFS that was a Q3 transaction were just raw materials in boxes?

A. Yes and no. I think he told me that, but at that point it didn't really matter other than he confirmed that raw material were put in boxes. Those were the only units that were in bill and hold status. That and two other transactions.

Q. Well, he told you that in Q3 raw materials had been put in boxes for the 100 units of the MFS transaction?

A. I don't recall him saying for the 100 units. He told me that raw materials were put in boxes.

Q. Well, did you ask him how many?

A. I think at that point all I was trying to do was confirm that similar things took place in prior quarters.

Q. Did you bring him in to tell Seth what happened?

A. Yes.

Q. And did he then repeat to Seth what happened in prior quarters?

A At that point I was in and out, but yes, I believe I repeated it to Seth.

Q. Did you tell Seth, you've got to hear this?

A. Yes.

Q. What was your reaction when you learned that in prior quarters raw materials had been put in boxes and used for sales?

A. Well, at this point it was post restatement. Okay, we're four days, three days past the restatement, or the announcement of the restatement. And those transactions had been reversed. Okay.

And from my point of view, from a financial perspective, the financial statements were materially in conformation with the nonrecognition of those transactions.

Q. So in your view this wasn't an important -- wasn't important information?

A. It was not the most important information. This information was going to be passed forward to the special committee that had been formed on Thursday the 22nd.

Q. And you saw no relevance to you in doing financial statements?

A. The financial statements were pretty much done on the 22nd.

Q. My question is: In your view this was not relevant during the financial statements?

A. I think it showed the same problem existed in prior quarters.

Q. During that day did you contact an attorney?

A. On Monday, the 26th?

Q. Yes.

A. Yes, I believe so.

Q. Would it be fair to say that you were concerned that this thing was out of control?

A. I'm sorry. There was chaos back to the board meeting of the 19th. I mean, does that mean the 26th was any more chaotic than any other day? I don't have an opinion on that one way or the other.

Q. When did you first contact the attorney?

A. The 26th.

Q. To your knowledge did Seth arrange to speak to the special committee the night of the 26th?

A. Yes.

Q. Did he try to get you to participate in that phone call?

A. He did.

Q. Did he tell you the importance of making the board aware of the inventory fraud?

MR. SULLIVAN: Objection, characterization of inventory fraud.

ARBITRATOR BEILEY: Why don't you rephrase the question?

MR. SULLIVAN: What are you referring to?

BY MS. SKOLNICK:

Q. Did he tell you the importance of making the board aware of what you had learned about Q4 and Q3; i.e., putting raw materials in boxes?

A. I did not participate in the call on the 26th. I can't recall what he told me on the 26th.

Q. You don't recall him telling you the importance of telling the special committee about the raw materials in the boxes?

A. I'm sorry, can we take a break here and give me the question again?

Q. Do you recall him telling you that it was important to tell the special committee that there had been activity in which raw materials were put in boxes and counted as goods?

A. I think Seth wanted me to have candor with the special committee. Did he specifically tell me to tell them about the raw materials in boxes? I do not recall.

Q. Well, did he tell you how important it was that somebody tell them about he raw materials in the boxes?

A. I don't recall.

Q. Did you think it was important that they know about the raw material in the boxes?

A. It was going to get to them.

Q. My question is: Did you think it was important that they know about it?

A. Well, everyone was going to talk at special committee.

Q. My question is: Did you think it was important that they know about it?

A. I think on the 27th when I reviewed my memo it highlighted some of those issues.

Q. I still have a question pending. Did you think it was important to let them know about these issues?

A. I thought that they would get to the bottom of these issues when the special committee convened.

Q. And so therefore you thought it was important?

A. Pardon me?

Q. Did you believe it was important that they know about it?

A. These issues were going to get fully vetted with the special committee.

Q. I've asked many, many times. I'll ask one more time.

Did you think it was important that the special committee know about it?

A. Of course.

Q. On January 26th there was a telephone conference with the special committee, was there not?

A. I believe there was a telephone conference with special committee. I was not present on the 26th.

Q. Did you actually get on the phone with your attorney briefly and tell them that you would not be speaking to them?

A. I don't remember my attorney being on the phone call. And I don't remember getting on the phone. But clearly they got the message that I would not talk that night.

Q. That afternoon did you make copies of documents at the office to give to your attorney?

A. I made copies of the documents to give to my attorney. I don't know that I copied them that afternoon.

Q. But some time during the week of the 26th you made copies of documents from the office to give to your attorney?

A. It could have been the week of the 19th, I don't know what day we made copies to give my attorney.

Q. Well, you didn't contact an attorney until the 26th?

A. That is correct.

Q. Does that help you as to when you made copies?

A. I made copies -- I don't know what day I physically made copies. I clearly made them for my own use to give to an attorney.

ARBITRATOR BEILEY: Just so I'm clear. Was your first contact with this attorney, whoever he was, on January 26th?

THE WITNESS: Yes.

BY MS. SKOLNICK:

Q. Do you recall on Monday, the 26th, during the day, Seth attempting to get a copy of the knowledge report from Dr. Zwan?

A. I remember Seth trying to get a copy of the knowledge report. I don't know if it was the 26th.

Q. But you do recall that he was trying to get a copy of the knowledge report?

A. Sure.

Q. Do you recall if Dr. Zwan gave him a copy of the knowledge report?

A. To the best of my knowledge, no.

Q. Do you recall Seth being frustrated by this?

A. I think he was.

Q. Referring you to Tuesday, the 27th, did Seth continue asking Zwan for the knowledge report on that day?

A. I suspect.

Q. But to your knowledge as of Tuesday he had still not received the knowledge report?

A. That is correct.

Q. Did he begin sending out e-mails to people saying you cannot destroy documents?

A. He began -- he sent out e-mails, I can't recall if that was on the 27th.

Q. But one of the things that he was doing was attempting to make sure that people knew that they could not destroy documents, would that be a fair characterization?

A. Yes.

Q. Was Denise Licciardi still around on the 27th?

A. I believe she was present in the office, yes.

Q. To your knowledge had she finally been terminated?

A. Yes. Oh, on the 27th?

Q. On the 27th?

A. She had been terminated on the 26th, but she wasn't leaving on the 26th.

Q. How do you know she had been terminated on the 26th? Did you see a termination agreement?

A. No. I heard Dr. Zwan represent to us that she had been terminated.

Q. But she was still around?

A. Yes.

Q. And to your knowledge was she still working in her various capacities at the company?

A. I don't know what she was doing.

Q. The 27th, was there a telephonic meeting with the special committee on the 27th?

A. Yes.

Q. And did Seth request that you participate in that meeting?

A. No, I think the purpose of the call was for me to participate in the meeting.

Q. Did you have discussions with Seth in which he urged you to participate in that meeting?

A. I had discussions with my at that time lawyer who said that if you're going to discuss factual issues then there should be no reservations about talking to the committee.

Q. My question though was: Did Seth urge you to talk to the committee on the 27th?

A. I think Seth wanted me to talk to the committee. I don't know if he urged me.

Q. Well, did he encourage you?

A. Sure.

Q. Did you in fact talk to the committee on the 27th?

A. Yes, I did.

Q. Where were you located?

A. In my home in St. Petersburg.

Q. Who else was present?

A. My wife, Chris, Seth and his wife Jackie.

Q. Was it on speaker phone?

A. Yes, it was.

Q. Who was present for the special committee, do you recall?

A. Bill Siefert, Bill Hamilton. Jeff Marshall and John Hentrich, I believe.

Q. John Hentrich was the attorney?

A. From Baker and McKenzie, yes.

Q. Looking at the memo that you sent to John Hentrich, which is Exhibit 43, during that phone call, did you go over Exhibit 43 with the committee?

A. Yes.

Q. Did it appear that they already had a copy of this in front of them?

A. I don't think so.

Q. You had sent it or -- do you remember when this was sent to John Hentrich, was it on the 25th or the 26th?

A. I suspect it was sent on the morning of the 26th.

Q. So perhaps Mr. Hentrich had it, but to your knowledge did the other special committee members have it?

A. The reason it went to Hentrich was to try to preserve the privilege. I don't think he distributed it in order to preserve the privilege.

Q. Did you then essentially read or summarize Exhibit 43 to the special committee?

A. Yes.

Q. What was their reaction?

A. Their reaction was that they would - they had formed a committee. First off, their reaction was thank you for your disclosure. Bill Siefert would be in town the following morning. The special committee had convened, that they would continue to do the work. And they would talk to me and a number of other people.

I also asked for Tom Williams to join the call because Tom Williams was not feeling comfortable now that we had confirmed that some of the, in Q2 and Q3, raw materials had gone into prior quarters.

Can I ask a question with all due respect?

Angelica, is there a reason why you're typing left and right?

MS. HUNNEFORD: Because I'm allowed.

MR. SULLIVAN: Is it distracting?

THE WITNESS: It is distracting.

MS. HUNNEFORD: Then I'll stop.

ARBITRATOR BEILEY: You certainly are allowed, but if it's distracting.

BY MS SKOLNICK:

Q. Did they give you words of encouragement?

A. Yes.

Q. Did you tell them that you were concerned for your safety?

A. I think so.

Q. Did you tell them that you wanted a security guard?

A. I think so.

Q. Did you actually get a security guard?

A. I did have a security guard for one night.

Q. Did they agree to pay for the security guard?

A. Dr. Zwan also agreed to pay for the security guard.

Q. Well, I'm asking you concerning the board. Did the board agree to pay for your security guard?

A. They said whatever it would take to make me feel comfortable, they were prepared to do that.

ARBITRATOR BEILEY: You mean the board or the special committee?

MS. SKOLNICK: The outside members. Let me just.

BY MS. SKOLNICK:

Q. Were all the outside members of the board members of the special committee to your knowledge?

A. All the outside members were the special committee.

Q. And I think you mentioned before that Tom Williams got on the phone?

A. Yes.

Q. Was that your idea to get Tom Williams on the phone?

A. Yes.

Q. Do you remember telling the board that you had lost confidence in Bryan?

A. I was angry at Bryan. I don't remember saying that I lost confidence in Bryan.

Q. Would you be surprised if you had said that?

A. I would not be surprised.

Q. Do you recall Bill Siefert saying during the meeting something to the effect of that the company had a cancer that had to be taken out?

A. I don't remember Bill Siefert saying it on that phone call.

Q. Is that an expression that Bill Siefert uses?

A. That is an expression that I heard Bill Siefert say literally two months before the deposition in April of this year.

Q. What was the expression or the substance of it?

A. He was describing to one of his colleagues at a trade show while talking to us that this management team did a terrific job in turning the company around. The company had a cancer that had to be cured.

Q. Let me refer you to Wednesday, January 28th. On Wednesday, January 28th, did you have occasion to meet with Dr. Zwan and Mr. Siefert in the afternoon?

A. Yes.

Q. Where did that meeting take place?

A. Dr. Zwan's office.

Q. And what did they tell you during that meeting?

A. They told me that there would be a reorganization, that Seth would be leaving, that Denise would be leaving. They questioned the need for both their positions. They said that you would be staying as CFO.

Q. "You" meaning?

A. Myself. They asked me if Jerry Gentile could continue, if I would agree to let Jerry Gentile continue as the VP of RAD.

Q. RAD meaning what?

A. Research and development. Joe Fuchs would be elevated a higher level of quality role. And I think there was a fourth item, I can't remember. But basically, and some other people as part of this reorganization would be let go.

Q. Jerry Gentile was someone who you demanded his resignation in your memo of January 25, 1998?

A. That's correct.

Q. You believe he was implicated with Denise Licciardi?

A. Yes.

Q. Do you recall in your discussions with Tom Williams that he also implicated Jerry Gentile in these inventory issues, putting raw materials into boxes?

A. Yes, because Tom Williams had indicated his authority had been undermined.

Q. So Tom Williams had also implicated Jerry Gentile?

A. Yes.

Q. Did you agree with Dr. Zwan and Mr. Siefert that it was okay to keep Jerry on?

A. Their argument was a compelling argument with respect to his contribution to the intellectual property of the company. And while I didn't formally agree, I acquiesced on the issue.

Q. So you didn't make an issue of it that he had to go?

A. They had a compelling argument to keep him.

Q. So you didn't make an issue?

A. I acquiesced.

Q. During this meeting did you bring up the issue that you wanted to negotiate a better deal with the company?

A. Contrary to your characterization here in the prior times --

Q. Could you just answer the question and not sort of tell me contrary to my characterization?

A. I am answering your question.

I asked for a different employment arrangement.

Q. And that was your idea to bring it up?

A. Absolutely.

Q. And did Siefert tell you that this wasn't exactly the appropriate time to do it?

A. Yes, he did.

Q. Over the next month did you negotiate with Dr. Zwan?

A. The way it was left Bill Siefert said, if you and Dr. Zwan could come to an agreement, he would present it to the board at the appropriate time.

Q. My question though was, over the next month did you negotiate a contract with Dr. Zwan?

A. Yes.

Q. Let me refer you to what is the proxy statement at 359.

ARBITRATOR BEILEY: 359 is in evidence.

BY MS. SKOLNICK:

Q. I am going to refer you to page 12 of that proxy statement, meaning 12 on the bottom.

A. On an April 15th, 1999 [sic] proxy statement on what would be the third page of the document?

Q. What I need is the 1998 proxy.

ARBITRATOR BEILEY: This is Exhibit 359 being a proxy statement of April 15th, 1998.

BY MS. SKOLNICK:

Q. I'm referring you to page 12 of that document. 12 meaning on the bottom.

A. Yes.

Q. In the middle of that page the large middle paragraph it says: The company entered into an employment agreement as of February 27th, 1998, the Grant agreement with Steve Grant.

If you could review that paragraph and tell me if those represent the terms of your contract.

A. I think it summarizes the contract.

Q. So it accurately reflects the terms of the contract?

A. I believe so.

Q. And this was the contract that the board approved after you negotiated with Zwan?

A. This was the final agreement that they approved. A prior agreement they rejected.

Q. Well, you had come up with a richer agreement with Dr. Zwan that he agreed to, but the board rejected?

A. They did reject it, yes.

Q. But Dr. Zwan had agreed to a richer agreement for you?

A. The board rejected it. And they suggested to Dr. Zwan to renegotiate certain portions of the agreement.

Q. Which he did?

A. Yes.

Q. But Dr. Zwan had originally agreed with you but it was subject to board approval?

A. It was always subject to board approval.

Q. Your contract was as of February 27th, 1998?

A. Yes.

Q. If I can refer you to the paragraph above the one that we just looked at in which it says: On February 11th, 1998, Ms. Denise Licciardi resigned from the company as vice-president administration.

She was permitted to resign, Mr. Grant?

A. Yes.

Q. She wasn't terminated?

A. I believe that as part of the termination they agreed to call it a resignation.

[end of excerpt at page 781]