MOD Systems Update on the Arrest of Former CEO Mark Phillips

In early 2009, one of MOD's shareholders, Robert Arnold, brought to the Company's attention certain allegations of wrongdoing directed at its former CEO and Director Mark Phillips and former VP of Finance and Director Kenn Gordon.  Mr. Arnold later filed a lawsuit against the Company, Philips, Gordon and others.  In response to these allegations, the Company's Board of Directors (including Mr. Phillips and Mr. Gordon) unanimously agreed to establish an independent Demand Review Committee (DRC) to oversee a full investigation of these claims. The investigation was conducted by Lane Powell PC and Tatum, LLC, two well-known and respected professional services firms, whose conclusions were confirmed by a leading national accounting firm.  This investigation found that Phillips and Gordon had, among other things, misappropriated corporate funds; misused MOD employees, assets and resources; and engaged in personal behavior contrary to the best interests of MOD and its shareholders. The investigation also found that other MOD executive team members, including the Company's current Chairman and CEO, Anthony Bay, were not involved in any way and the lawsuit against MOD and Mr. Bay was ultimately dropped.  Mr. Arnold is now an active supporter of the Company and its management.

In April 2009, the Company placed Phillips and Gordon on administrative leave based on the investigation.  Gordon was terminated for cause in May 2009 and Phillips was terminated for cause in December 2009, based in part on conduct that led to his recent arrest.  MOD continues to pursue legal recourse against Phillips to recoup $1.3 million in misappropriated funds, among other claims.

In addition, Mr. Arnold has filed an additional lawsuit against Phillips, Gordon, Doug Lower and A DOT Corporation, a company owned by Phillips, alleging, among other things, corporate looting, embezzlement/conversion, breach of fiduciary duty and fraud.  That suit is pending.

On March 30, 2010, Phillips was arrested and charged with two counts of federal wire fraud by the U.S. Attorney's Office.  MOD has fully cooperated with the U.S. Attorney's office during its investigation and will continue to do so.

In spite of the distraction, MOD has successfully moved forward over the past year with the full support of its investors and strategic partners, which include NCR Corporation, Toshiba Corporation and Deluxe Entertainment Services Group Inc. You can follow MOD Systems, learn about new partnerships and initiatives, and stay informed at www.modsystems.com.