Agreement and Plan of Merger among Netword, Inc., Webspeak Acquisition Corp., and Home Director, Inc. (April 9, 2002)

     EXECUTION COPY

Table of Contents

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HD Disclosure Schedule
Parent Disclosure Schedule

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     THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”) is entered into as of the 9th day of April, 2002, by and among Netword, Inc. a Delaware corporation (“Parent”), Webspeak Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (“Sub”), and Home Director, Inc., a Delaware corporation (”HD”).

     A.     HD and Digital Interiors, Inc., a California corporation and a wholly-owned subsidiary of HD (“DI”), are engaged in the business of providing home networking infrastructure, technology and services (the “Business”).

     B.     HD and Parent desire to merge their respective companies and business operations through the statutory merger of Sub with and into HD, with HD as the surviving corporation, all on the terms and subject to the conditions set forth herein (the “Merger”).

     C.     The authorized capital stock of HD consists of (i) 35,000,000 shares of Series A Convertible Preferred Stock, par value $0.001 per share (“HD Series A Preferred”), (ii) 100,000,000 shares of Series B Convertible Preferred Stock, par value $0.001 per share (“HD Series B Preferred”), (iii) 12,000,000 shares of Series C Convertible Preferred Stock, par value $0.001 per share (“HD Series C Preferred”), (iv) 150,000,000 shares of Common Stock, par value $0.001 per share (“HD Common”, and together with the HD Series A Preferred, the HD Series B Preferred, and the HD Series C Preferred, the “HD Shares”), and (iv) options, warrants and other rights to acquire HD Shares, including the Interim Notes, the Interim Warrants, the Bridge Notes and the Agency Warrants (as such terms are defined below).

     D.     In contemplation of the Merger, certain investors (including Parent) have invested a total of $705,000 in HD (the “Interim Financing”) by purchasing (i) 8% convertible notes issued by HD (each, an “Interim Note”), and (ii) warrants to purchase in the aggregate 10,071,429 shares of HD Common at an initial exercise price of $0.07 per share (“Interim Warrants”).

     E.     In contemplation of the Merger, Spencer Trask Ventures, Inc. (“ST”), has agreed to act as placement agent to assist HD in conducting an offering (the “Rights Offering”) of HD securities to holders of HD Series A Preferred, HD Series B Preferred and HD Series C Preferred (collectively, “HD Preferred”) and others promptly after the date hereof on the material terms set forth in Annex A hereto, pursuant to which (a) such holders and others will be offered units (“Units”) of $100,000, each comprising an 8% convertible note of HD automatically convertible immediately prior to the Effective Time (as defined in Section 1.3) into shares of HD Common (a “Bridge Note”), and (b) ST will receive warrants (“Agency Warrants”) to purchase shares of HD Common, or, if exercised after the Effective Time, Parent Shares, pursuant to the terms of a Placement Agency Agreement between HD, ST and certain HD stockholders.

     F.     Prior to commencing the Rights Offering, HD will have entered into commitments or other arrangements with its existing creditors for the restructuring of certain of its trade debt and other debt (the “Debt Restructuring”), as specifically described in Section 4.8(b) of the HD Disclosure Schedule (as defined in Article IV).

     G.     Upon the closing of the Rights Offering, the Interim Notes will automatically convert into Bridge Notes.

     H.     Pursuant to the Merger, among other things, (i) all of the issued and outstanding HD Shares are to be converted into the right to receive shares of common stock of Parent, par value $0.01 per share (“Parent Shares”), on the terms set forth herein, and (ii) all issued and outstanding options to purchase HD Shares (“HD Options”) and warrants to purchase HD Shares, including the Interim Warrants, the Agency Warrants and any other warrants held by ST (“HD Warrants”), are to be assumed by Parent and exchanged for options or warrants to purchase Parent Shares, pursuant to the exchange procedures set forth herein.

     I.     50% of the Parent Shares issuable by Parent in connection with the Merger are to be placed in escrow with the Lock-Up Escrow Agent (as defined herein), to be released pursuant to and in accordance with the lock-up restrictions set forth in a Lock-Up Escrow Agreement, substantially in the form attached hereto as Exhibit A (the “Lock-Up Escrow Agreement”).

     J.     The respective Boards of Directors of Parent, Sub and HD have approved the Merger, upon the terms and subject to the conditions set forth herein. The Board of Directors of Parent has determined to recommend that the stockholders of Parent consent to, adopt and approve certain amendments to the Parent’s Certificate of Incorporation in contemplation of the Merger, including (i) the Parent Split (as defined below), and (ii) a change of the name of Parent to “Home Director, Inc.” (the “Parent Stockholder Consent”). A form of the Parent’s Certificate of Amendment, to be filed with the office of the Secretary of State of Delaware prior to the Effective Time, is attached hereto as Exhibit B (the “Parent Amendment”). The Board of Directors of HD has determined to recommend that the stockholders of HD adopt and approve this Agreement and approve the Merger.

     K.     HD has agreed to cause stockholders owning approximately 52% of the HD Shares entitled to vote on the Merger to enter into a voting agreement with Parent on or before April 30, 2002, substantially in the form attached hereto as Exhibit C (the “Voting Agreement”), whereby such stockholders will agree to vote all HD Shares beneficially owned by them in favor of approval and adoption of this Agreement and approval of the Merger.

     L.     It is contemplated that at or prior to the Effective Time, Parent will effect a 1 for 40 reverse split of the Parent Shares (the “Parent Split”), and prior to consummation of the Rights Offering, HD will effect a 1 for 10 reverse split of the HD Common (the “HD Split”).

     M.     The parties intend that the Merger will qualify, for federal income tax purposes, as a tax-free reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the “Code”).

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     NOW, THEREFORE, in consideration of the covenants, representations and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed as follows:

     1.1    The Merger.   Upon the terms and subject to the satisfaction or waiver of the conditions hereof, and in accordance with the applicable provisions of the Delaware General Corporation Law, as amended (the “DGCL”), at the Effective Time, (a) Sub shall be merged with and into HD, (b) the separate existence of Sub shall cease, and (c) HD shall continue as the surviving corporation in the Merger under the laws of the State of Delaware under the name “Home Director Technologies, Inc.”(or another name as Parent and HD may mutually agree) in a transaction intended to qualify as a tax-free reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. For purposes of this Agreement, HD shall be referred to, for the period commencing as of the Effective Time, as the “Surviving Corporation.”

     1.2    Closing and Closing Date.   Unless this Agreement shall have been terminated pursuant to Section 8.1 and the transactions herein contemplated shall have been abandoned, the closing of the Merger (the “Closing”) will take place as soon as practicable, but in no event later than 5:00 p.m. New York time on the third business day after the satisfaction or waiver of the conditions set forth in Article VII, or at such other time as Parent and HD may mutually agree (the “Closing Date”). The Closing shall take place at the offices of Kronish Lieb Weiner &Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036, unless another place is mutually agreed by Parent and HD.

     1.3    Effective Time of the Merger; Parent Amendment.  

     1.4    Effect of the Merger.  The Merger shall, from and after the Effective Time, have all the effects provided by the DGCL. If at any time after the Effective Time, any further action is deemed necessary or desirable to carry out the purposes of the Agreement, then the Surviving Corporation and its proper officers and directors shall be authorized to take, and shall take, any and all such action.

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     2.1     Certificate of Incorporation.  At the Effective Time, the Certificate of Incorporation of HD shall be the Certificate of Incorporation of the Surviving Corporation; provided, however, that at the Effective Time, the Certificate of Incorporation of the Surviving Corporation shall be amended in its entirety so that it will read as Sub’s Certificate of Incorporation, except that the name of the Surviving Corporation shall be “Home Director Technologies, Inc.”(or another name as Parent and HD may mutually agree). As so amended, the Certificate of Incorporation of HD as in effect immediately prior to the Effective Time shall thereafter continue in full force and effect as the Certificate of Incorporation of the Surviving Corporation until further altered or amended as provided therein or by Applicable Law.

     2.2     Bylaws.  The Bylaws of HD, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation, until thereafter changed or amended as provided therein or by Applicable Law.

     2.3    Board of Directors; Officers.  

     3.1     Merger Consideration.  At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Sub, HD, the holders of HD Shares (the “HD Stockholders”), or the holders of common stock of Sub, par value $0.01 per share (the “Sub Common Stock”), the following shall occur:

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     3.2     Dissenting Shares.   Notwithstanding any provision hereof to the contrary, any HD Shares held by a Dissenting Stockholder (as hereinafter defined) shall not be converted as described in Section 3.1, but instead such shares (the “Dissenting Shares”) shall be converted into the right to receive such consideration as may be determined to be due a Dissenting Stockholder pursuant to the DGCL; provided, however, that if a Dissenting Stockholder shall fail to perfect his demand, withdraw his demand or otherwise lose his right of appraisal under the terms of the DGCL, then the HD Shares held by such Dissenting Stockholder shall not be Dissenting Shares and shall be deemed to be converted as of the Effective Time in accordance with the provisions hereof, including Section 3.1. HD shall not voluntarily make any payment with respect to, settle, or offer to settle or otherwise negotiate, any such demands. All amounts paid to Dissenting Stockholders shall be paid without interest thereon (to the extent permitted by Applicable Law) by the Surviving Corporation. For purposes hereof, the term “Dissenting Stockholder” shall mean a holder of HD Shares who has demanded and perfected its right to appraisal of such shares in accordance with Section 262 of the DGCL.

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     3.3    Exchange of Certificates.  

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     3.4     No Further Rights.  The Merger Consideration delivered to the Lock-Up Escrow Agent and the HD Stockholders upon the surrender for exchange of Old Certificates representing HD Shares in accordance with the terms hereof (including any dividends or distributions) shall be deemed to have been issued in full satisfaction of all rights pertaining to such HD Shares. From and after the Effective Time, holders of Old Certificates theretofore evidencing HD Shares shall cease to have any rights as stockholders of HD, except as provided herein or by Applicable Law.

     3.5     Closing of HD’s Transfer Books.  At the Effective Time, the stock transfer books of HD shall be closed and no transfer of HD Shares shall be made thereafter. If after the Effective Time, Old Certificates are presented to Parent or the Surviving Corporation, such Old Certificates shall be cancelled and exchanged for Merger Consideration in accordance with Section 3.1, subject to the terms of the Lock-Up Escrow Agreement and, in the case of Dissenting Stockholders, Applicable Law.

     As of the date hereof, or such earlier date as may be specified in any instance, HD makes the following representations and warranties to Parent and Sub. Such representations and warranties include and are qualified by the HD Disclosure Schedule delivered to Parent concurrently with the execution and delivery of this Agreement (the “HD Disclosure Schedule”), and to the extent specifically referenced in the following Sections of this Article IV.

     4.1     Organization and Qualification.   HD and each Subsidiary (as defined in Section 4.4) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of HD and each Subsidiary has the requisite corporate power and authority to carry on its business as it is now being conducted and each is duly qualified or licensed to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except for those jurisdictions the absence of which would not, individually or in the aggregate, have a Material Adverse Effect (as defined in Section 10.10). Set forth in Section 4.1 of the HD Disclosure Schedule is a list of all states and foreign jurisdictions in which HD and each Subsidiary is qualified to do business. Complete and correct copies of the Certificate of Incorporation and Bylaws of HD and each Subsidiary have been delivered to Parent and such Certificates of Incorporation and Bylaws have not been amended and are in full force and effect. The minute book of each of HD and DI, true and complete copies of which have been delivered or made available to Parent, (a) accurately reflect in all material respects all action taken by the directors and stockholders of HD and DI at meetings of the Board of Directors or stockholders of HD and DI and (b) contain true and complete copies, or originals, of the respective minutes of all meetings or consent actions of the HD directors or stockholders and the DI directors or stockholders.

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     4.2     Authority.   Each of HD and each Subsidiary have the necessary corporate power and authority to execute and deliver this Agreement. The execution and delivery hereof and the consummation of the transactions contemplated hereby by HD have been duly and validly authorized and approved by the HD Board of Directors and no other corporate or stockholder proceedings on the part of HD or its Board of Directors are necessary to authorize or approve this Agreement or to consummate the transactions contemplated hereby, except for the approval and adoption of this Agreement and the Merger by (i) the holders of HD Shares, voting together as one class, (ii) the holders of the HD Series A Preferred, voting as a separate class, (iii) the holders of the HD Series B Preferred, voting as a separate class, and (iv) the holders of the HD Series C Preferred, voting as a separate class (collectively, the “HD Stockholder Approval”). The HD Board of Directors has recommended that the stockholders of HD approve and adopt this Agreement and approve the Merger. This Agreement has been duly executed and delivered by HD, and assuming due authorization, execution and delivery by Parent and Sub, constitutes the valid and binding obligation of HD, enforceable in accordance with its terms.

     4.3     Capitalization.  (a)  The authorized capital stock of HD consists of (i) 150,000,000 shares of Preferred Stock, $0.001 par value, of which (A) 35,000,000 shares are designated as HD Series A Preferred, of which 33,333,333 shares are issued and outstanding, (B) 100,000,000 shares are designated as HD Series B Preferred, of which 44,959,249 shares are issued and outstanding, and (C) 12,000,000 shares are designated as HD Series C Preferred, of which 10,000,000 shares are issued and outstanding; and (ii) 150,000,000 shares of HD Common, of which 11,233,723 shares are issued and outstanding. All outstanding capital stock of HD was issued in accordance with applicable federal and state securities laws. Except as set forth in Section 4.3 of the HD Disclosure Schedule and other than the Interim Notes, the Bridge Notes, the Interim Warrants and the Agency Warrants, there are no options, warrants, calls, convertible notes, agreements, commitments or other rights presently outstanding that would obligate HD to issue, deliver or sell shares of its capital stock, or to grant, extend or enter into any such option, warrant, call, convertible note, agreement, commitment or other right. Except as set forth in Section 4.3 of the HD Disclosure Schedule, as of the date hereof, HD has no bond, debenture, note or other indebtedness issued or outstanding that has voting rights in HD. HD has provided to Parent a list of (i) all holders of record of (A) HD Shares, and (B) options, warrants, convertible notes or other rights to purchase capital stock of HD (collectively “HD Stock Rights”); and (ii) the number of HD Shares held by each HD Stockholder and the number of HD Shares represented by the HD Stock Rights; and (iii) the exercise price for each HD Stock Right.

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     4.4     Subsidiaries.   Except as set forth in Section 4.4 of the HD Disclosure Schedule, HD does not own or control, directly or indirectly, any equity interest, or any security convertible into an equity interest, in any corporation, partnership, limited liability company, joint venture, association or other business entity (any of the foregoing, a “Subsidiary”).

     4.5     No Conflicts, Required Filings and Consents.   Except as set forth in Section 4.5 of the HD Disclosure Schedule, none of (i) the execution and delivery of this Agreement by HD, (ii) the consummation by HD of the transactions contemplated hereby (including the Merger) or (iii) compliance by HD with any of the provisions hereof will:

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     4.6    Financial Statements; Books and Records.  

     4.7     Absence of Changes.   Except as set forth in Section 4.7 of the HD Disclosure Schedule and except as contemplated hereby or specifically referenced in the recitals, since December 31, 2001:

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     4.8     Undisclosed Liabilities; Debt Restructuring.   (a)  Except as set forth in Section 4.8(a) of the HD Disclosure Schedule, neither HD nor any Subsidiary has any debt, liability or obligation of any kind, whether accrued, contingent, absolute or otherwise, including any liability or obligation on account of litigation, taxes or any governmental charge or penalty, interest or fine, except (a) liabilities incurred in the ordinary course of business after December 31, 2001 that do not exceed $25,000 in the aggregate which are not reflected in the HD Financial Statements; (b) liabilities reflected in the HD Financial Statements; (c) liabilities under the Interim Notes and the Bridge Notes; and (d) liabilities incurred as a result of the transactions contemplated hereby.

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     4.9     Title to Properties.   Except as set forth in Section 4.9 of the HD Disclosure Schedule, HD has good and valid title to, or a good and valid leasehold interest in, all tangible property and assets used in the Business, in each case, free and clear of any and all Liens other than Permitted Liens (as defined in Section 10.10).

     4.10     Equipment.  HD owns or leases under valid and subsisting leases all items of tangible personal property (including computer hardware) used in the operation of the Business (the “HD Equipment”). Each item of HD Equipment (i) is in good condition and repair, ordinary wear and tear excepted; (ii) has received continued repair and replacement in accordance with past practice through the date hereof; (iii) is suitable for its current use; and (iv) is currently in use by HD or a Subsidiary in the operation of the Business. The HD Equipment is free of any material structural or engineering defects. Each plant and facility, including all equipment and supplies used to operate such plant or facility, of HD and each Subsidiary is not in violation of any use or occupancy restriction, limitation, commission or covenant of record, or any material zoning or building law, code or ordinance or public utility or other easements, including without limitation the Americans with Disabilities Act of 1990, as amended, and all rules and regulations promulgated thereunder and all rules, regulations and orders of the Occupational Safety and Health Administration.

     4.11    Intellectual Property.  

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     4.12     Real Property.   Except as set forth in Section 4.12 of the HD Disclosure Schedule:

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     4.13     Leases.   Section 4.13 of the HD Disclosure Schedule sets forth a list of each lease pursuant to which HD or a Subsidiary lease, as lessor or lessee, real or personal property used in operating the Business (or otherwise) that requires payments by HD or any Subsidiary in excess of $50,000 in the aggregate (the “HD Leases”). Copies of the HD Leases, all of which have previously been provided to Parent, are true and complete copies thereof. Except as set forth in Section 4.13 of the HD Disclosure Schedule, all of the HD Leases are valid, binding and enforceable against HD or a Subsidiary, as the case may be, and, to the knowledge of HD, against the other parties thereto, in accordance with their respective terms, and there is not under any such Lease any existing default by HD or a Subsidiary or, to the knowledge of HD, by any other party thereto, or any condition or event that, with notice or lapse of time or both, would constitute a default. Neither HD nor any Subsidiary has received notice that the lessor of any of the HD Leases intends to cancel, suspend or terminate such Lease or to exercise or not exercise any option thereunder.

     4.14    Contracts.  

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     4.15     Directors and Officers.  Section 4.15 of the HD Disclosure Schedule sets forth an accurate list of the name of each director and officer of HD and each Subsidiary and the position(s) held by each.

     4.16    Litigation.  

     4.17    Employee Benefit Plans/Labor Relations.  

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     4.18    ERISA.  

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     4.20     Compliance with Applicable Laws.   HD and its Subsidiaries hold all material permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary to own, lease or operate all of their assets and properties, as appropriate, and to carry on the Business as now conducted (the “HD Permits”). HD and its Subsidiaries are in material compliance with Applicable Law and the terms of each of the HD Permits. True and complete copies of the HD Permits have previously been provided or made available to Parent.

     4.21     Stockholder Approval.   The Board of Directors of HD has determined to recommend that the HD Stockholders approve and adopt this Agreement and approve the Merger.

     4.22     Brokers.   Except as set forth in Section 4.22 of the HD Disclosure Schedule, no broker or finder is entitled to any broker’s, banker’s or finder’s fee or other commission in connection with the transactions contemplated hereby as a result of arrangements made by or on behalf of HD and its Subsidiaries.

     4.23     Environmental Matters.   Except as set forth in Section 4.23of the HD Disclosure Schedule:

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     4.24     Interest in Customers, Suppliers and Competitors.  To the knowledge of HD, no officer, director, stockholder or employee of HD or any Subsidiary and no family member (including a spouse, parent, sibling or lineal descendent of any of the foregoing), has any direct or indirect material interest in any customer, supplier or competitor of HD or any Subsidiary, or in any Person from whom or to whom HD or any Subsidiary leases any real or personal property, or in any other Person with whom HD or any Subsidiary is doing business whether directly or indirectly (including as a debtor or creditor), whether in existence as of the date hereof or proposed, other than the ownership of stock of publicly traded corporations.

     4.25     Insurance.  HD currently maintains, in full force and effect, insurance policies (the “HD Insurance Policies”) in scope and amount of coverage consistent with industry practice. True and complete copies of all HD Insurance Policies have previously been provided or made available to Parent. Neither HD nor any Subsidiary (a) is in default under the provisions of any HD Insurance Policy; (b) has failed to pay any premiums due thereunder; nor (c) has failed to present any notice or material claim thereunder in a due and timely fashion. There are no claims by HD or any Subsidiary pending under any of the HD Insurance Policies as to which coverage has been denied or disputed by the underwriters of such policies.

     4.26     Product and Service Warranties.   Except as set forth in Section 4.26 of the HD Disclosure Schedule, there are no pending or, to the knowledge of HD, threatened, claims, suits, actions or proceedings involving HD or any Subsidiary with respect to any warranties express or implied, written or oral, with respect to the products or services manufactured, sold or provided by HD and its Subsidiaries. HD has provided or made available to Parent, the form of all written warranties furnished by HD and its Subsidiaries to purchasers of any product or service offered by HD and its Subsidiaries since their respective dates of formation.

     4.27     Territorial Restrictions.   Neither HD nor any Subsidiary is restricted by any agreement or understanding with any other Person from carrying on its business anywhere in the world.

     4.28     Inventories.   Except as set forth in Section 4.28 of the HD Disclosure Schedule and net of reserves as reflected in the HD Financial Statements, (a) inventories are of such quality as to meet the quality control standards of HD and its Subsidiaries and are of such a quality and quantity as to be usable in the ordinary course of business, and (b) inventories that are finished goods are saleable in the ordinary course of business.

     4.29     Suppliers and Customers.   Section 4.29 of the HD Disclosure Schedule sets forth (i) the five largest suppliers of HD and each Subsidiary, (ii) all sole source suppliers of HD and each Subsidiary and (iii) the five largest customers of HD and each Subsidiary for the period from January 1, 2001 through the date hereof. During such period, none of such customers has cancelled in whole or in part its agreement or commitment with HD or such Subsidiary to purchase products or services (or threatened in writing to do any of the foregoing) and none of such suppliers and sole source suppliers has cancelled in whole or in part its agreement or commitment to supply services or supplies to HD or such Subsidiary (or threatened in writing to do any of the foregoing). To the knowledge of HD, the relationship of HD and its Subsidiaries, with each of its suppliers and each of its customers is a good commercial working relationship. To the knowledge of HD, no supplier or customer has threatened to cancel or otherwise substantially modify its relationship with HD or any Subsidiary or to limit its services, supplies or materials to HD or any Subsidiary, or its usage or purchase of the services and products of HD or any Subsidiary either as a result of the transactions contemplated hereby or otherwise.

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     4.30     Disclosure.   No statement of fact by HD contained herein and no written statement of fact furnished by HD to Parent or Sub in connection herewith, taken as a whole (inclusive of the HD Disclosure Schedule), contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein not misleading in light of the circumstances in which they were made.

     4.31     Information Supplied.   None of the information supplied or to be supplied by HD or any Subsidiary specifically for inclusion or incorporation by reference in (i) the Registration Statement (as defined in Section 6.9) will, at the time the Registration Statement becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading or (ii) the Proxy Statement (as defined in Section 6.9) will, at the date it is first mailed to the stockholders of HD and Parent or at the time of the HD Stockholder Approval, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Registration Statement and the Proxy Statement will comply as to form in all material respects with the requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as applicable, and the respective rules and regulations promulgated thereunder. No representation or warranty is made by HD with respect to statements made or incorporated by reference in the Proxy Statement based on information supplied by Parent specifically for inclusion or incorporation by reference in the Proxy Statement.

     As of the date hereof, or such earlier date as may be specified in any instance, Parent and Sub jointly and severally make the following representations and warranties to HD. Such representations and warranties include and are qualified by the Parent Disclosure Schedule delivered to HD concurrently with this Agreement (the “Parent Disclosure Schedule”) and to the extent specifically referenced in the following Sections of this
Article V.

     5.1     Organization and Qualification.   Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Sub was formed for the sole purpose of effecting the Merger and has not conducted any business or incurred any liabilities or obligations since its formation. Complete and correct copies of the Certificate of Incorporation and Bylaws of Parent and Sub, each as in effect on the date hereof, have been delivered or made available to HD. Each of Parent and Sub has the requisite corporate power and authority to carry on its business as it is now being conducted and is duly qualified or licensed to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect.

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     5.2     Authority.   Each of Parent and Sub has the necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery hereof and the consummation of the transactions contemplated hereby by Parent and Sub have been duly and validly authorized and approved by Parent’s and Sub’s Board of Directors and no other corporate or stockholder proceedings on the part of Parent or Sub are necessary to authorize or approve this Agreement or to consummate the transactions contemplated hereby, except for the Parent Stockholder Consent. This Agreement has been duly executed and delivered by Parent and Sub and, assuming the due authorization, execution and delivery by HD, constitutes the valid and binding obligation of Parent and Sub, enforceable against each in accordance with its terms.

     5.3     No Conflicts, Required Filings and Consents.   Except as set forth in Section 5.3 of the Parent Disclosure Schedule, none of the execution and delivery hereof by Parent or Sub, the consummation by Parent and Sub of the transactions contemplated hereby, or compliance by Parent and Sub with any of the provisions hereof, will:

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     5.4     Brokers.   No broker or finder is entitled to any broker’s or finder’s fee in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Parent or Sub.

     5.5    Capitalization.  

     5.6     Subsidiaries.   Except for Parent’s ownership of all of the issued and outstanding shares of Sub Common Stock, neither Parent nor Sub owns or controls, directly or indirectly, any equity interest, or any security convertible into an equity interest, in any entity, other than as listed in Section 5.6 of the Parent Disclosure Schedule.

     5.7    Intellectual Property.  

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     5.8    Contracts.  

     5.9     Leases.    Section 5.9 of the Parent Disclosure Schedule sets forth a list of each lease pursuant to which Parent or Sub lease, as lessor or lessee, real or personal property used in operating Parent’s business (or otherwise) that requires payments by or to Parent or Sub that exceed $50,000 in the aggregate (the “Parent Leases”). Copies of the Parent Leases, all of which have previously been provided to HD, are true and complete copies thereof. All of the Parent Leases are valid, binding and enforceable against Parent or Sub, as the case may be, and, to the knowledge of Parent, against the other parties thereto, in accordance with their respective terms, and there is not under any such Lease any existing default by Parent or Sub or, to the knowledge of Parent, by any other party thereto, or any condition or event that, with notice or lapse of time or both, would constitute a default. Neither Parent nor Sub has received notice that the lessor of any of the Parent Leases intends to cancel, suspend or terminate such Lease or to exercise or not exercise any option thereunder.

     5.10     Title to Properties.  Except as set forth in Section 5.10 of the Parent Disclosure Schedule, Parent has good and valid title to, or a good and valid leasehold interest in, all tangible property and assets used in the conduct of its business, in each case, free and clear of any and all Liens other than Permitted Liens.

     5.11    Taxes.   Except as set forth in Section 5.11 of the Parent Disclosure Schedule:

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     5.12    Employee Benefit Plans; Labor Relations.  

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     5.13     Undisclosed Liabilities.   Except as set forth in Section 5.13 of the Parent Disclosure Schedule, neither Parent nor Sub has any debt, liability or obligation of any kind, whether accrued, contingent, absolute or otherwise, including any liability or obligation on account of litigation, taxes or any governmental charge or penalty, interest or fine, except (a) liabilities incurred in the ordinary course of business after December 31, 2001 that do not exceed $25,000 in the aggregate which are not reflected in the Parent Financial Statements; (b) liabilities reflected in the Parent Financial Statements; and (c) liabilities incurred as a result of the transactions contemplated hereby.

     5.14    SEC Filings; Parent Financial Statements.  

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     5.15     Compliance with Applicable Laws.   Parent holds all material permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary to own, lease or operate all of its assets and properties, as appropriate, and to carry on Parent’s business as now conducted (the “Parent Permits”). Both Parent and Sub are in material compliance with Applicable Law and the terms of the Parent Permits. True and complete copies of all Parent Permits have been delivered or made available to HD

     5.16     Absence of Material Adverse Effect.  Except as set forth in the Parent SEC Reports or in Section 5.16 of the Parent Disclosure Schedule and except as contemplated hereby, since December 31, 2001, there has been no event or condition of any character that has had, or could reasonably be expected to have, a Material Adverse Effect as to Parent or Sub.

     5.17    Litigation.  

     5.18     Disclosure.   No statement of fact by Parent or Sub contained herein and no written statement of fact furnished by Parent or Sub to HD in connection herewith, taken as a whole (inclusive of the Parent Disclosure Schedule), contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein contained, in light of the circumstances in which they were made, not misleading.

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     5.19     Information Supplied.   None of the information supplied or to be supplied by Parent specifically for inclusion or incorporation by reference in (i) the Registration Statement will, at the time the Registration Statement becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (ii) the Proxy Statement will, at the date it is first mailed to the stockholders of HD and Parent or at the time of the HD Stockholder Approval, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Registration Statement and the Proxy Statement will comply as to form in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and the respective rules and regulations promulgated thereunder. No representation or warranty is made by Parent with respect to statements made or incorporated by reference in the Registration Statement or the Proxy Statement based on information supplied by HD specifically for inclusion or incorporation by reference in the Registration Statement or the Proxy Statement, as the case may be.

     6.1     Conduct of the Business by HD and Parent Pending the Merger.   (a)  From and after the date hereof and prior to the Closing, except as contemplated hereby, or as specified in Section 6.1 of the HD Disclosure Schedule, unless Parent shall otherwise agree in advance in writing, HD and each Subsidiary shall (i) conduct its operations only in the ordinary course of business consistent with past practice, (ii) use commercially reasonable efforts to preserve intact its present business organization, keep available the services of its officers, consultants and key employees and preserve its relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with HD or such Subsidiary, as the case may be, as well as with officials and employees of Governmental Entities which regulate HD or any Subsidiary, to the end that its goodwill and on-going businesses shall not be impaired in any material respect at the Closing by its failure to do any of the foregoing, and (iii) not take any action which could adversely affect the ability of the parties to consummate the transactions contemplated by this Agreement, except where required by Applicable Law. Without limiting the generality of the foregoing and except as contemplated by this Agreement, the Interim Financing and the Rights Offering, from the date hereof until the Closing Date, HD and each Subsidiary shall (x) not declare or pay any dividend or distribution on the HD Shares, and (y) not sell or otherwise dispose of any of its tangible assets (other than inventory in the ordinary course of business).

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     6.2     Access to Information.   From the date hereof through the Closing, HD, Parent and Sub shall, and shall each cause its authorized representatives (including its officers, directors, employees, counsel, advisors, accountants and financial advisors) to (a) provide to the authorized representatives of the other, full and complete access during normal business hours (and at such other times as the parties may mutually agree), upon reasonable notice, to its properties, books, contracts, commitments, records and personnel and, during such period, shall furnish promptly to the other all information concerning its business, properties and personnel as the other may reasonably request; and (b) furnish to the other and its authorized representatives all information reasonably requested and as customarily furnished in transactions of this nature. Without limiting the generality of the foregoing, immediately following the execution and delivery of this Agreement, each of HD, Parent and Sub shall, and shall cause its representatives to, provide to the other and its authorized representatives full and complete access to its financial and accounting records, together with all written or oral agreements, instruments, notices, documents, licenses, permits, financial data or other information related or ancillary thereto, or reasonably requested by the other in connection with its evaluation thereof. Each of HD, Parent, Sub and their authorized representatives, shall, in the exercise of the rights described in this Section 6.2, not unduly interfere with the operation of the business of the other parties.

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     6.3     Filings; Tax Elections.   Each of HD, each Subsidiary, Parent and Sub shall promptly provide the other parties hereto with copies of all filings made by it with any Governmental Entity in connection herewith and the transactions contemplated hereby. HD shall, before settling or compromising any material income tax liability, consult with Parent and its advisors as to the positions and elections that will be taken or made with respect to such matter.

     6.4     Public Announcements.   Prior to the Closing Date, no news release or other public announcement pertaining in any way to the transactions contemplated by this Agreement will be made by any party hereto without the prior consent of the other parties hereto (which consent shall not be unreasonably withheld, conditioned or delayed) unless such release or announcement is required by Applicable Law. If such release or announcement is required by Applicable Law, the party making such release or announcement shall provide a copy thereof to the other party within a reasonable time prior to publication, and the other party shall have the right to review and comment on such release or announcement.

     6.5     Transfer Taxes.   Each of Parent and HD, respectively, shall timely pay any stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes or fees not including any income tax, gross receipts tax or any similar tax measured with respect to gross or net income (collectively, the “Transfer Taxes”) imposed on it at or prior to the Closing in connection with the transactions contemplated hereunder that are required to be paid in connection therewith. Parent and HD shall cooperate in the preparation, execution and filing of all tax returns, questionnaires, applications, or other documents regarding any such Transfer Taxes.

     6.6     Options and Warrants.   (a) At the Effective Time, each HD Option under the HD Stock Option Plan or otherwise, shall by virtue of the Merger, be assumed by Parent. Each HD Option so assumed by Parent under this Agreement will continue to have, and be subject to, the same terms and conditions set forth in the HD Stock Option Plan and any other document governing such option immediately prior to the Effective Time (including, without limitation, any repurchase rights or vesting provisions), except that (i) each HD Option will be exercisable (or will become exercisable in accordance with its terms) for that number of Parent Shares equal to the product of the number of shares of HD Common that were issuable upon exercise of such HD Option immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded up to the nearest whole number of Parent Shares, and (ii) the per share exercise price for the Parent Shares issuable upon exercise of such assumed HD Option (the “Adjusted Option Price”) shall be equal to the quotient of (A) the aggregate exercise price for the shares of HD Common otherwise purchasable pursuant to such HD Option divided by (B) the aggregate number of Parent Shares deemed purchasable pursuant to such HD Option (each, as so adjusted, an “Adjusted Option”); provided that such exercise price shall be rounded down to the nearest whole cent, and (iii) any restriction on the exercisability of such HD Option shall continue in full force and effect, and the term, exercisability, vesting schedule, acceleration provisions and other provisions of such HD Option shall remain unchanged. It is the intention of the parties that the HD Options so assumed by Parent following the Effective Time will remain incentive stock options as defined in Section 422 of the Code to the extent such options qualified as incentive stock options prior to the Effective Time. As soon as practicable after the Effective Time, Parent shall issue to each Person who, immediately prior to the Effective Time was a holder of an outstanding HD Option under the HD Stock Option Plan or otherwise, a document evidencing the foregoing assumption of such HD Option by Parent.

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     6.7    Employment.  

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     6.8     Exclusivity.   (a) HD, each Subsidiary, Parent, Sub and each of their respective officers, directors and employees, covenants and agrees that, from the date hereof until the earlier to occur of (i) the Closing or (ii) the termination of this Agreement in accordance with Section 8.1 (the “Exclusivity Period”), it and each of them shall forebear from directly or indirectly negotiating, soliciting or accepting any offer with or from any other Person to purchase, acquire, or merge or combine with, as applicable, HD, any Subsidiary, Parent or Sub or any capital stock or assets of the foregoing, or any interest in any of the foregoing. Without limiting the generality of the foregoing:

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     6.9    Preparation of Proxy Statement; Registration Statement on Form S-4.  

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     6.10     Appointment of New Directors.   Immediately after the Closing, Parent shall cause each director of HD as of the date preceding the Closing Date to be elected as a director of Parent.

     6.11     Rights Offering.  HD and each Subsidiary shall use their best efforts to commence the Rights Offering as soon as practicable after the execution of this Agreement and consummate the Rights Offering in accordance with the terms set forth in Annex A hereto.

     6.12     Listing of Parent Shares.   As soon as practicable after the Merger, Parent will take such action as may be commercially reasonable (i) to satisfy NASDAQ criteria for listing the Parent Shares on the Small Cap or National Market, and (ii) apply for the listing of the Parent Shares on the NASDAQ Small Cap or National Market.

     6.13     Further Assurances.   From time to time after the Closing, upon the reasonable request of any party hereto, the other party or parties hereto shall execute and deliver or cause to be executed and delivered such further instruments, and take such further action, as the requesting party may reasonably request in order to effectuate fully the purposes, terms and conditions hereof.

     6.14     Indemnification of Parent Officers, Directors and Employees.

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     6.15     Parent Guaranty.   Parent hereby agrees to absolutely, unconditionally and irrevocably guarantee the full and timely performance by Sub of all Sub’s obligations under this Agreement.

     6.16     Voting Agreement.   HD hereby agrees that it will cause HD Stockholders holding approximately 52% of the HD Shares entitled to vote on the Merger to enter into the Voting Agreement on or before April 30, 2002.

     7.1     Conditions to Obligations of HD to Effect the Merger.   The obligations of HD to effect the Merger shall be subject to the fulfillment at or prior to the Closing of the following conditions:

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     7.2     Conditions to Obligations of Parent and Sub to Effect the Merger.   The obligations of Parent and Sub to effect the Merger shall be subject to the fulfillment, at or prior to the Closing, of the following conditions:

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     7.3     Mutual Covenants and Obligations.   Except as otherwise required by law, the parties agree for U.S. federal income tax purposes to report, to the extent any such report or filing is required under U.S. Treasury Regulations Section 1.368-3 or otherwise, the Merger as a transaction described in Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, and to refrain from engaging in any transaction subsequent to the Closing which would cause the Merger to fail to meet the requirements of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. The parties agree to cooperate in the provision of such information as may reasonably be required in the event, subsequent to the Closing, the U.S. Internal Revenue Service challenges the qualification of the transaction thereunder.

     8.1     Termination.   This Agreement may be terminated at any time prior to the Closing:

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     8.2     Fees and Expenses; Termination Fee.

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     8.3     Amendment.   This Agreement may be amended at any time by an instrument in writing signed on behalf of all of the parties hereto.

     8.4     Waiver.   At any time prior to the Closing, Parent and Sub, on the one hand, or HD, on the other hand, may, to the extent permitted by Applicable Law, (i) extend the time for the performance of any of the obligations or other acts of the other party hereto, (ii) waive any inaccuracies in the representations and warranties by the other parties contained herein or in any documents delivered by the other parties pursuant hereto and (iii) waive compliance with any of the agreements of the other parties or with any conditions to its own obligations contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party.

     9.1     Intentionally Omitted.  

     10.1     Survival; Recourse.  None of the agreements contained herein shall survive the Merger, except that the agreements contained in Article I, the additional agreements contained in Article VI and the agreements referred to in Section 7.3 and Section 8.2 shall survive the Merger indefinitely (except to the extent a shorter period of time is explicitly specified therein).

     10.2     Notices.   All notices or other communications hereunder shall be in writing and shall be deemed to be given when delivered in person or by private courier or express delivery service with receipt, when telefaxed and received, or three (3) days after being deposited in the United States mail, first class, registered or certified, return receipt requested, with postage prepaid, addressed as follows:

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or to such other address as any party may have furnished to the other parties in writing in accordance with this Section 10.2.

     10.3     Entire Agreement; Enforcement.  (a) The Exhibits, the HD Disclosure Schedule and the Parent Disclosure Schedule form a part of this Agreement. This Agreement and the documents and instruments referred to herein and to be delivered pursuant hereto constitute the entire agreement between the parties pertaining to the subject matter hereof, and supersede all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof, including that certain Letter of Intent entered into between Parent and HD dated January 30, 2002, except that the provisions contained in paragraph 6 and paragraph 7 of such Letter of Intent shall remain in full force and effect. There are no other representations or warranties, whether written or oral, between the parties in connection with the subject matter hereof.

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     10.4     Assignments; Parties in Interest.  Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing herein, express or implied, is intended to or shall confer upon any Person not a party hereto any right, benefit or remedy of any nature whatsoever under or by reason hereof, except as otherwise provided herein.

     10.5     Governing Law; Consent to Jurisdiction.  

     10.6     Headings; Interpretation.  The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation hereof. Words such as “herein,” “hereof,” “hereto,” “hereunder” or the like refer to this Agreement as a whole. The words “include” or “including” denote an example rather than a limitation. The words “or,” “either” or “any” shall not be exclusive. Any pronoun used herein shall include the corresponding masculine, feminine or neuter forms. The parties hereto have participated jointly in the negotiation and drafting hereof; accordingly, no presumption or burden of proof shall arise in favor or against any party by virtue of the authorship hereof. References to Sections, Articles or Exhibits shall, unless the context otherwise requires, be to Sections, Articles or Exhibits hereof.

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     10.7     Counterparts; Facsimile.   This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute a single agreement. This Agreement may be executed by facsimile signature.

     10.8     Severability. If any term or other provision hereof is invalid, illegal or incapable of being enforced pursuant to any rule of law or public policy, all other terms and provisions hereof shall nevertheless remain in full force and effect so long as the economics or legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to any party. Upon determination by a court of competent jurisdiction that any term or other provision hereof is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as may be possible to the fullest extent permitted by Applicable Law to the end that the transactions contemplated hereby shall be fulfilled to the extent possible.

     10.9     Currency.  All payments required by the terms of this Agreement shall be made in the currency of the United States of America. Any references herein to “dollars” or other monetary units shall be deemed to refer to the currency of the United States of America.

     10.10     Certain Definitions.   As used herein:

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[Remainder of Page Intentionally Blank, Signature Page Follows]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.