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Subject to Completion
Preliminary Proxy Materials, dated September 28, 2009

To our BIO-key International, Inc. Stockholders:

SPECIAL MEETING OF STOCKHOLDERS – YOUR VOTE IS IMPORTANT

You are cordially invited to attend a Special Meeting of Stockholders of BIO-key International, Inc., or BIO-key, to be held on [                      ], 2009 at the offices of Choate, Hall & Stewart LLP, located at Two International Place, Boston, Massachusetts, commencing at [         a.m. Eastern Time].  At the special meeting, BIO-key is seeking your consideration and approval for:

1.                                the sale of substantially all of the assets of BIO-key’s Law Enforcement Division, which we refer to as the Law Enforcement Division, to InterAct911 Mobile Systems, Inc., or InterAct, a wholly-owned subsidiary of InterAct911 Corporation, for an aggregate purchase price of $11,000,000, which we refer to as the Asset Sale, pursuant to and on the terms and conditions set forth in an Asset Purchase Agreement, dated as of August 13, 2009, which we refer to as the Asset Purchase Agreement;

2.                                the grant of discretionary authority to BIO-key’s board of directors to adjourn or postpone the special meeting, even if a quorum is present, to solicit additional votes to approve the Asset Purchase Agreement and Asset Sale, if necessary; and

3.                                consideration and transaction of such other business as may properly come before the special meeting or any adjournments or postponements thereof.

As consideration for the Asset Sale, BIO-key will be paid an aggregate of $11,000,000, of which $7,000,000 will be paid in cash at the closing of the proposed transaction, subject to customary adjustments as provided in the Asset Purchase Agreement.  BIO-key will also receive a promissory note in the original principal amount of $4,000,000 issued by InterAct, guaranteed by InterAct911 Corporation and one of its owners SilkRoad Equity, LLC, a private investment firm that owns 48.75% of InterAct911 Corporation’s equity interests on a fully diluted basis (“SilkRoad”), and secured by a pledge of all of the intellectual property assets of the Law Enforcement Division being transferred to InterAct as part of the Asset Sale.  This promissory note is to be paid in three equal installments beginning on the first anniversary of the closing and will bear interest, payable on a quarterly basis, at a rate per annum equal to six percent (6%) compounded annually on the principal sum from time to time outstanding.

If the Asset Purchase Agreement and the Asset Sale are approved at the special meeting and the Asset Sale is consummated, BIO-key will transfer substantially all of its assets, and certain specified liabilities, related to its Law Enforcement Division to InterAct, and BIO-key will continue to exist as a separate public company.  Additionally, as consideration for and at the closing of the Asset Sale, SilkRoad will be issued a warrant to purchase for cash up to 8,000,000 shares of BIO-key’s common stock, at an exercise price equal to $0.30 per share.  The warrant will expire on the fifth anniversary of the closing of the proposed Asset Sale.

BIO-key’s board of directors has carefully reviewed and considered the terms and conditions of the Asset Purchase Agreement and the Asset Sale and has concluded that the Asset Purchase Agreement and the Asset Sale are both in the best interests of BIO-key and its stockholders.  BIO-key’s board of directors therefore has approved these proposals and recommends that you vote FOR each of the proposals set forth in the accompanying proxy statement.

You are also encouraged to review carefully the enclosed proxy statement, as it explains the reasons for the proposals to be voted on at the special meeting and contains other important information, including a copy of the Asset Purchase Agreement, which is attached as Annex A.  In particular, please review the matters referred to under “Risk Factors” starting on page [      ] of the proxy statement for a discussion of the risks related to the proposed Asset Sale and the business of BIO-key.

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.  Approval of the Asset Purchase Agreement and Asset Sale requires the affirmative vote of the holders of a majority of the outstanding shares of BIO-key common stock.  Approval of the adjournment proposal requires the affirmative vote of a majority of the stockholders present in person or by proxy of the holders of shares of common stock having a majority of the votes which could be cast by the holders of all outstanding shares of common stock entitled to vote at the special meeting.  If you do not (i) submit your proxy, (ii) instruct your

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broker to vote your shares or (iii) vote in person at the special meeting, it will have the same effect as a vote AGAINST approval of the  Asset Sale pursuant to the terms of the Asset Purchase Agreement and will have no effect on the adjournment proposal.

After careful consideration, the BIO-key board of directors unanimously recommends that you vote FOR each of the proposals to be presented at the special meeting.

The board of directors of BIO-key appreciates and encourages stockholder participation in BIO-key’s affairs and invites you to attend the special meeting in person.  It is important, however, that your shares be represented at the special meeting in any event and for that reason, whether or not you expect to attend the special meeting, please take a moment to complete, date, sign and return the accompanying proxy in the enclosed postage-paid envelope.  You may also vote via telephone or over the Internet, as described in the enclosed proxy and in the enclosed proxy statement.  Returning the proxy or voting over the telephone or Internet does not deprive you of your right to attend the special meeting and to vote your shares in person.  Moreover, you may revoke your proxy at any time before it has been voted.  If you hold your shares in “street name,” you should instruct your broker how to vote in accordance with your instruction card.

We thank you for your cooperation, attention to these matters and continued support and look forward to seeing you at the special meeting.

Neither the Securities and Exchange Commission nor any state securities regulatory has approved or disapproved the Asset Sale described in this proxy statement or determined if this proxy statement is accurate or adequate.  Any representation to the contrary is a criminal offense.

This proxy statement is dated [                        ], 2009, and is first being mailed to BIO-key stockholders on or about [                            ], 2009.

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BIO-key International, Inc.
3349 Highway 138, Building D, Suite B
Wall, New Jersey  07719

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on [                      ], 2009

To our Stockholders:

A special meeting of stockholders of BIO-key International, Inc., a Delaware corporation, which we refer to as the Company or BIO-key, will be held on [                      ], 2009 at the offices of Choate, Hall & Stewart LLP, located at Two International Place, Boston, Massachusetts, commencing at [         a.m. Eastern Time].  The special meeting is being held to consider and vote upon the following proposals for:

After careful consideration, the board of directors of BIO-key has determined that the Asset Sale and the Asset Purchase Agreement are in the best interests of BIO-key and its stockholders.  The BIO-key board of directors has approved the Asset Purchase Agreement and the Asset Sale and recommends that you vote FOR the approval of the Asset Sale pursuant to the terms of the Asset Purchase Agreement and FOR the approval of the adjournment proposal.  The proposals are described in more detail in the accompanying proxy statement, which you should read in its entirety before voting.

Only holders of record of BIO-key’s common stock at the close of business on [                      ], 2009, are entitled to notice of and to vote at the special meeting or any adjournment or postponement thereof.  Approval of the Asset Sale proposal requires the affirmative vote of the holders of a majority of the outstanding shares of BIO-key common stock.  Approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the outstanding shares of BIO-key common stock present, either in person or by proxy, and entitled to vote at a special meeting.  Therefore, your vote is very important.  Your failure to vote your shares will have the same effect as voting against the Asset Sale proposal but will have not effect on the adjournment proposal.

All stockholders are cordially invited to attend the special meeting in person.  To ensure your representation at the special meeting and the presence of a quorum at the special meeting, whether or not you plan to attend the special meeting, please complete, sign and date the enclosed proxy card and return it to BIO-key without delay in the postage-paid envelope enclosed for your convenience or submit your proxy by telephone or the Internet as provided on the proxy card.  If a quorum is not reached, BIO-key’s proxy solicitation costs are likely to increase.  Should you receive more than one proxy card because your shares are registered in different names and/or addresses, each proxy card should be signed, dated and returned to ensure that all of your shares will be voted.  Please also note that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the special meeting, you must obtain from the record holder a proxy issued in your name.  If you are present at the special meeting, you may revoke your proxy and vote personally on the matters properly before the special meeting.  For specific instructions on voting, please refer to the instructions on the proxy card.  Your shares will be voted at the special meeting in accordance with your proxy.

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IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON [                    ], 2009.

In accordance with new rules approved by the Securities and Exchange Commission, we are providing this notice to our stockholders to advise them of the availability on the Internet of our proxy materials related to our special meeting.  The new rules allow companies to provide access to proxy materials in one of two ways.  Because we have elected to utilize the “full set delivery” option, we are delivering our proxy materials to our stockholders under the “traditional” method, by providing paper copies, as well as providing access to our proxy materials on a publicly accessible Web site.

Our proxy statement and proxy are enclosed and are also available on at http://[                                  ].

YOUR VOTE IS IMPORTANT.

IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE URGED TO VOTE YOUR SHARES AS SOON AS POSSIBLE SO THAT YOUR SHARES CAN BE VOTED AT THE SPECIAL MEETING IN ACCORDANCE WITH YOUR INSTRUCTIONS ON THE PROXY CARD.  PLEASE VOTE BY (1) TELEPHONE, (2) USING THE INTERNET OR (3) COMPLETING AND PROMPTLY RETURNING THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED.

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PROXY STATEMENT

FOR THE

SPECIAL MEETING OF STOCKHOLDERS

To Be Held On [                      ], 2009

This proxy statement is provided in connection with the solicitation of proxies by the board of directors of BIO-key International, Inc. (“BIO-key” or the “Company”) for a special meeting of stockholders to be held at [           a.m. Eastern Time], on [                              ], 2009 at the offices of Choate, Hall & Stewart LLP, located at Two International Place, Boston, Massachusetts, and at any adjournment or postponement thereof.  The telephone number at that location is (617) 248-5000.  Our principal executive offices are located at 3349 Highway 138, Building D, Suite B, Wall, New Jersey 07719.  Our telephone number at our principal executive offices is (732) 359-1100.  As used herein, the terms “we,” “us,” “our” and similar terms refer to the Company.

This proxy statement and the accompanying proxy card are expected to be mailed on or about [                              ], 2009 to all stockholders entitled to vote at the special meeting.

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SUMMARY

The following summary highlights selected information from this proxy statement and contains cross references to the more detailed discussions elsewhere in the proxy statement.  This summary may not contain all of the information that is important to you.  For a more complete description of the Asset Purchase Agreement, the Asset Sale contemplated by the Asset Purchase Agreement and the proposed matters on which you will vote, you should carefully read this entire document and the documents to which we have referred you, including the attached annexes.

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QUESTIONS AND ANSWERS ABOUT THE ASSET SALE AND THE SPECIAL MEETING

The following are some questions that you, as a stockholder of BIO-key International, Inc., may have regarding the Asset Sale and the special meeting and we have provided brief answers to those questions below.  We urge you to read carefully the remainder of this proxy statement because the information in this section may not provide all the information that might be important to you with respect to the proposals being considered at the special meeting.  Additional important information is also contained in the annexes to, and the documents incorporated by reference in, this proxy statement.

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RISK FACTORS

In addition to the other information contained or incorporated by reference in this proxy statement, including the matters addressed in “Cautionary Statements Concerning Forward-Looking Statements” beginning on page [      ] of this proxy statement, BIO-key stockholders should carefully consider the following risk factors in deciding whether to vote for the proposals set forth herein.

Risks Related to the Asset Sale

We will incur significant costs in connection with the Asset Sale, whether or not we complete it.

We currently expect to incur approximately $600,000 of costs related to the Asset Sale.  These expenses include, but are not limited to, financial advisory, legal and accounting fees and expenses, filing fees, printing expenses, proxy solicitation and other related charges.  We may also incur additional unanticipated expenses in connection with the Asset Sale.  Approximately $350,000 of the costs related to the Asset Sale, such as legal, financial advisory and accounting fees, will be incurred regardless of whether the Asset Sale is completed.  Additionally, if the Asset Sale proposal is not approved by the stockholders, we may be required to pay InterAct $1,000,000 as a termination fee.  These expenses will decrease the Company’s available cash.

Failure to complete the Asset Sale may negatively affect BIO-key’s ability to repay its outstanding obligations, its customer relations and/or its stock price.

BIO-key has incurred recurring operating losses and has substantial outstanding liabilities, including a cash settlement payment in the aggregate principal amount of $2,164,922 to Longview Special Finance, Inc. and Longview Fund, L.P., half of which was paid on July 7, 2009 and the remainder, which accrues interest at seventeen percent (17%) per year, is due on October 31, 2009.  BIO-key has also issued an unsecured promissory note in the aggregate principal amount of $1,000,000 to The Shaar Fund, Ltd., a holder of shares of the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock, which bears interest at eight percent (8%) per annum and is due and payable in full on November 4, 2009.

If the Asset Sale is not completed for any reason, BIO-key will likely be subject to a number of material risks, including the following:

·                  BIO-key may not be able to make the necessary investments in the Law Enforcement Division to keep it market competitive and, at the same time, make the necessary investments to grow its Biometrics business;

·                  BIO-key may be unable to dispose of its assets for values equaling or exceeding its liabilities and obligations, particularly the assets that are the subject of the Asset Sale, which may be substantially diminished in value;

·                  BIO-key may be unable to secure additional capital or to enter into an alternative business combination transaction;

·                  BIO-key may not be able to pay any amounts that may become due to the holders of its outstanding convertible preferred stock as a result of the mandatory redemption provisions of such preferred stock;

·                  BIO-key may not be able to satisfy its other outstanding liabilities and obligations when due;

·                  BIO-key may be required to pay InterAct a termination fee of $1,000,000; and

·                  BIO-key’s customers may, in response to the announcement and pendency of the Asset Sale, delay or defer purchasing decisions, which would have a negative impact on BIO-key’s ongoing business.

The occurrence of any of the above will likely impair the ability of BIO-key to conduct its operations and business.  In addition, the price of BIO-key common stock may decline further if the current market price of BIO-key common stock reflects an assumption that the Asset Sale will be completed.

We cannot be certain if or when the Asset Sale will be completed.

The consummation of the Asset Sale is subject to the satisfaction of various conditions, many of which are beyond our control, including but not limited to, the approval of the Asset Sale by our stockholders and a termination right held by InterAct if the

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Asset Sale is not completed by January 31, 2010.  We cannot guarantee that we will be able to satisfy the relevant closing conditions set forth in the Asset Purchase Agreement.  If we are unable to satisfy such conditions, InterAct will not be obligated to complete the Asset Sale.

If the Asset Sale does not occur, we anticipate that we would continue to seek to dispose of the assets used in the Law Enforcement Division on terms acceptable to our board of directors and, at the same time, enter into discussions with the holders of our outstanding convertible preferred stock to resolve any amounts that may become due to such holders as a result of the mandatory redemption provisions of such preferred stock.  We also anticipate that if we were to be unable to satisfy our obligations to the Longview entities and The Shaar Fund, as discussed above, in full on a timely basis, we would need to reach an agreement with those parties to extend or otherwise amend such obligations.  We may also need to seek to raise additional capital from third party financing sources.  To the extent that we require such additional financing, no assurance can be given that any form of additional financing will be available on terms acceptable to us, that adequate financing will be obtained to meet our needs, or that such financing would not be dilutive to existing stockholders.  If available financing is insufficient or unavailable or we fail to continue to generate meaningful revenue, we may be required to further reduce operating expenses, delay the expansion of operations, be unable to pursue merger or acquisition candidates, or continue as a going concern.

The Asset Purchase Agreement limits BIO-key’s ability to pursue alternatives to the Asset Sale.

The Asset Purchase Agreement contains provisions that make it more difficult for BIO-key to sell its Law Enforcement Division to a party other than InterAct prior to the closing of the Asset Sale or the termination of the Asset Purchase Agreement.  These provisions include the general prohibition on BIO-key soliciting any acquisition proposal or offer for a competing transaction, the requirement that BIO-key pay a termination fee of $1,000,000 if the Asset Purchase Agreement is terminated in specified circumstances and the requirement that BIO-key submit the principal terms of the Asset Sale to a vote of BIO-key stockholders, even if the BIO-key board of directors changes its recommendation.  See “The Asset Purchase Agreement — Termination” beginning on page [      ] of this proxy statement and “The Asset Purchase Agreement — Obligation of the BIO-key Board of Directors with Respect to Its Recommendation and Holding of a Stockholders’ Meeting” beginning on page [      ] of this proxy statement.

These provisions could discourage a third party that might have an interest in acquiring all or a significant part of the Law Enforcement Division from proposing an acquisition, even if such third party were prepared to pay consideration with a higher value than the consideration to be paid by InterAct.  Furthermore, the termination fee may result in a potential competing acquirer offering to pay a lower purchase price to acquire the Law Enforcement Division than it might otherwise have offered to pay.  The payment of the termination fee could also have an adverse effect on BIO-key’s financial condition.

Certain executive officers and employees of BIO-key have interests in the Asset Sale that may be different from, or in addition to, the interests of BIO-key stockholders.

When considering the BIO-key board of directors’ recommendation that BIO-key stockholders vote in favor of the Asset Sale proposal, BIO-key stockholders should be aware that certain executive officers of BIO-key have interests in the Asset Sale that may be different from, or in addition to, the interests of BIO-key stockholders.  These interests include those of Kenneth Souza, the Executive Vice President and General Manager, Law Enforcement of the Company.  On October 4, 2008, BIO-key renewed its year-to-year employment agreement with Mr. Souza to serve as Executive Vice President and General Manager, Law Enforcement of the Company.  InterAct has agreed to assume BIO-key’s obligations to Mr. Souza under that employment agreement following the Asset Sale and it is anticipated that Mr. Souza will become an employee of InterAct.  The BIO-key board of directors discussed these interests prior to voting to approve the Asset Sale.  For a full description of the interests of BIO-key’s executive officers and employees in the Asset Sale, see “Proposal One — The Asset Sale Proposal — Interests of Executive Officers and Employees of BIO-key in the Asset Sale” beginning on page [      ] of this proxy statement.

RISK FACTORS RELATING TO BIO-KEY

Based on our lack of significant revenue since inception and recurring losses from operations, our auditors have included an explanatory paragraph in their opinion as to the substantial doubt about our ability to continue as a going concern.

Due to, among other factors, our history of losses (excluding gains from valuation changes in embedded derivatives) and limited revenue, our independent auditors have included an explanatory paragraph in their opinion for the year ended December 31, 2008, as to the substantial doubt about our ability to continue as a going concern.  Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to operate as a going concern.  Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.

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Since our formation, we have historically generated minimal revenue and have sustained substantial operating losses.

As of December 31, 2008, we had negative working capital of approximately $4,100,000 and an accumulated deficit of approximately $54,781,000.  Since our inception, we have focused almost exclusively on developing our core technologies and, until the fourth quarter of 2004, had not generated any significant revenue.  In order to increase revenue, we have developed a direct sales force and anticipate the need to retain additional sales, marketing and technical support personnel and may need to incur substantial expenses.  We cannot assure you that we will be able to secure these necessary resources, that a significant market for our technologies will develop or that we will be able to achieve our targeted revenue.

Our biometric technology has yet to gain widespread market acceptance and we do not know how large of a market will develop for our technology.

Biometric technology has received only limited market acceptance, particularly in the private sector.  Our technology represents a novel security solution and we have not yet generated significant sales.  Although recent security concerns relating to identification of individuals has increased interest in biometrics generally, it remains an undeveloped, evolving market.  Biometric based solutions compete with more traditional security methods including keys, cards, personal identification numbers and security personnel.  Acceptance of biometrics as an alternative to such traditional methods depends upon a number of factors including:

·                  the reliability of biometric solutions;

·                  public perception regarding privacy concerns; and

·                  costs involved in adopting and integrating biometric solutions.

For these reasons, we are uncertain whether our biometric technology will gain widespread acceptance in any commercial markets or that demand will be sufficient to create a market large enough to produce significant revenue or earnings.  Our future success depends, in part, upon business customers adopting biometrics generally, and our solution specifically.

Biometric technology is a new approach to Internet security which must be accepted in order for our WEB-key ® solution to generate significant revenue.

Our WEB-key ® authentication initiative represents a new approach to Internet security which has been adopted on a limited basis by companies which distribute goods, content or software applications over the Internet.  The implementation of our WEB-key ® solution requires the distribution and use of a finger scanning device and integration of database and server side software.  Although we believe our solutions provide a higher level of security for information transmitted over the Internet than existing traditional methods, unless business and consumer markets embrace the use of a scanning device and believe the benefits of increased accuracy outweigh implementation costs, our solution will not gain market acceptance.

Our software products may contain defects which will make it more difficult for us to establish and maintain customers.

Although we have completed the development of our core biometric technology, it has only been used by a limited number of business customers.  Despite extensive testing during development, our software may contain undetected design faults and software errors, or “bugs” that are discovered only after it has been installed and used by a greater number of customers.  Any such defect or error in new or existing software or applications could cause delays in delivering our technology or require design modifications. These could adversely affect our competitive position and cause us to lose potential customers or opportunities.  Since our technologies are intended to be utilized to secure physical and electronic access, the effect of any such bugs or delays will likely have a detrimental impact on us.  In addition, given that biometric technology generally, and our biometric technology specifically, has yet to gain widespread acceptance in the market, any delays will likely have a more detrimental impact on our business than if we were a more established company.

While we have commenced a significant sales and marketing effort, we have only begun to develop a significant distribution channel and may not have the resources or ability to sustain these efforts or generate any meaningful sales.

In order to generate revenue from our biometric products, we are dependent upon independent original equipment manufacturers, system integrators and application developers, which we do not control.  As a result, it may be more difficult to generate sales.

We market our technology through licensing arrangements with:

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·                  Original equipment manufacturers, system integrators and application developers which develop and market products and applications which can then be sold to end users; and

·                  Companies which distribute goods, services or software applications over the Internet.

As a technology licensing company, our success will depend upon the ability of these manufacturers and developers to effectively integrate our technology into products and services which they market and sell.  We have no control over these licensees and cannot assure you that they have the financial, marketing or technical resources to successfully develop and distribute products or applications acceptable to end users or generate any meaningful revenue for us.  These third parties may also offer the products of our competitors to end users.

We derive the majority of our revenue from government contracts, which are often non-standard, involve competitive bidding, may be subject to cancellation with or without penalty and may produce volatility in earnings and revenue.

Most of our business involves providing products and services under contracts with U.S. federal, state and local government agencies.  Obtaining contracts from government agencies is challenging, and government contracts often include provisions that are not standard in private commercial transactions.  For example, government contracts may:

·                  include provisions that allow the government agency to terminate the contract without penalty under some circumstances;

·                  be subject to purchasing decisions of agencies that are subject to political influence;

·                  contain onerous procurement procedures; and

·                  be subject to cancellation if government funding becomes unavailable.

Securing government contracts can be a protracted process involving competitive bidding. In many cases, unsuccessful bidders may challenge contract awards, which can lead to increased costs, delays and possible loss of the contract for the winning bidder.

We face intense competition and may not have the financial and human resources necessary to keep up with rapid technological changes, which may result in our technology becoming obsolete.

The Internet, facility access control and information security markets are subject to rapid technological change and intense competition.  We compete with both established biometric companies and a significant number of startup enterprises as well as providers of more traditional methods of access control.  Most of our competitors have substantially greater financial and marketing resources than we do and may independently develop superior technologies, which may result in our technology becoming less competitive or obsolete.  We may not be able to keep pace with this change.  If we are unable to develop new applications or enhance our existing technology in a timely manner in response to technological changes, we will be unable to compete in our chosen markets. In addition, if one or more other biometric technologies such as voice, face, iris, hand geometry or blood vessel recognition are widely adopted, it would significantly reduce the potential market for our fingerprint identification technology.

We depend on key employees and members of our management team, including our Chairman of the Board and Chief Executive Officer, in order to achieve our goals. We cannot assure you that we will be able to retain or attract such persons.

A loss of our current Chairman of the Board of Directors or Chief Executive Officer could severely and negatively impact our operations.  Our consulting contract with Thomas J. Colatosti, our Chairman of the Board of Directors and acting Chief Financial Officer, expires in November 2009.  Mr. Colatosti continues to assist the Company in the areas of strategic planning and corporate finance.  In addition, we had an employment contract with Michael W. DePasquale, our Chief Executive Officer, through May 2009.  We anticipate that Mr. DePasquale will enter into a new employment contract with BIO-key following the closing of the Asset Sale.  Although that contract would not prevent him from resigning, it would contain confidentiality and non-compete clauses which are intended to prevent him from working for a competitor within one year after leaving our Company.  Our success depends on our ability to attract, train and retain employees with expertise in developing, marketing and selling software solutions.  In order to successfully market our technology, we will need to retain additional engineering, technical support and marketing personnel.  The market for such persons remains highly competitive and our limited financial resources will make it more difficult for us to recruit and retain qualified persons.

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We cannot assure you that the intellectual property protection for our core technology provides a sustainable competitive advantage or barrier to entry against our competitors.

Our success and ability to compete is dependent in part upon proprietary rights to our technology.  We rely primarily on a combination of patent, copyright and trademark laws, trade secrets and technical measures to protect our propriety rights.  We have filed a patent application relating to both the optic technology and biometrics solution components of our technology wherein several claims have been allowed. Over the last few years, the U.S. Patent Office has issued us a series of patents for our Vector Segment fingerprint technology (“VST”), and our other core biometric analysis and identification technologies.  We cannot assure you that any additional patents will be issued or that we will have the resources to protect any patent from infringement.  Although we believe our technology does not currently infringe upon patents held by others, we cannot assure you that such infringements do not exist or will not exist in the future.

We may need to obtain additional financing to execute our business plan, which may not be available. If we are unable to raise additional capital or generate significant revenue, we may not be able to continue operations.

Since our inception, we have not generated significant, recurring revenue (other than revenue from acquired businesses) and have experienced substantial losses.  In January 2006, we received approximately $1,000,000 in a private placement convertible debt offering, and in August 2006, we raised approximately $2,000,000 in gross proceeds through a private issuance of equity securities, of which $1,500,000 was received in cash and $500,000 was paid by an exchange of rights to declared and unpaid dividends.  In May 2007, we received approximately $1,800,000 in net proceeds from the sale of our Fire/EMS Services division.

If we are unable to generate sufficient revenue to meet our goals, we will need to obtain additional third-party financing to (i) conduct the sales, marketing and technical support necessary to execute our plan to substantially grow operations, increase revenue and serve a significant customer base; and (ii) provide working capital.  Therefore, we may need to obtain additional financing through the issuance of debt or equity securities, or to restructure our financial position through similar transactions to those consummated during 2006 and 2007.

We cannot assure you that we will ever be able to secure any such financing on terms acceptable to us.  If we cannot obtain such financing, we may not be able to execute our business plan or continue operations.

We may not achieve sustainable profitability with respect to the law enforcement and biometric components of our business if we are unable to maintain, improve and develop the wireless data services we offer.

We believe that our future business prospects depend in part on our ability to maintain and improve our current services and to develop new ones on a timely basis.  Our services will have to achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements.  As a result of the complexities inherent in our service offerings, major new wireless data services and service enhancements require long development and testing periods.  We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements.  Additionally, our new services and service enhancements may not achieve market acceptance.  If we cannot effectively develop and improve services we may not be able to recover our fixed costs or otherwise become profitable.

Our law enforcement and biometric division depends upon wireless networks owned and controlled by others.

If we do not have continued access to sufficient capacity on reliable networks, we may be unable to deliver services and our sales could decrease.  Our ability to grow and achieve profitability partly depends on our ability to buy sufficient capacity on the networks of wireless carriers such as Verizon Wireless, Bell South Corporation, Metrocall, Motient and AT&T Wireless and on the reliability and security of their systems.  All of our services are delivered using airtime purchased from third parties.  We depend on these companies to provide uninterrupted and bug free service and would not be able to satisfy our customers’ needs if they failed to provide the required capacity or needed level of service.  In addition, our expenses would increase and our profitability could be materially adversely affected if wireless carriers were to increase the prices of their services.  Our existing agreements with the wireless carriers generally have one-year terms.  Some of these wireless carriers are, or could become, our competitors and if they compete with us, they may refuse to provide us with their services.

New laws and regulations that impact our law enforcement and biometric division could increase our costs or reduce our opportunities to earn revenue.

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regulation by the FCC or another regulatory agency.  In addition, the wireless carriers who supply us airtime and certain of our hardware suppliers are subject to regulation by the FCC and regulations that affect them could increase our costs or reduce our ability to continue selling and supporting our services.

If we fail to adequately manage our resources, it could have a severe negative impact on our financial results or stock price.

We could be subject to fluctuations in technology spending by existing and potential customers.  Accordingly, we will have to actively manage expenses in a rapidly changing economic environment.  This could require reducing costs during economic downturns and selectively growing in periods of economic expansion.  If we do not properly manage our resources in response to these conditions, our results of operations could be negatively impacted.

Our obligations to the holders of our outstanding preferred stock may adversely affect our ability to enter into potential significant transactions with other parties.

We will need to obtain the consent of the holders of a majority of the then outstanding shares of our convertible preferred stock before we can take certain actions, including the following:

·                                          a sale or other disposition of any material assets;

·                                          an acquisition of a material amount of assets;

·                                          engaging in a merger, reorganization or consolidation; or

·                                          incur or guaranty any indebtedness in excess of $50,000.

Accordingly, unless we obtain such consent, we may not be able to enter into certain transactions.

We have issued a substantial number of securities that are convertible into shares of our common stock which will result in substantial dilution to the ownership interests of our existing shareholders.

As of December 31, 2008, approximately 67,691,000 shares of our common stock were reserved for issuance upon exercise or conversion of the following securities (at conversion prices applicable as at December 31, 2008):

·                  17,589,000 shares upon exercise of outstanding stock options and warrants;

·                  2,899,000 shares upon exercise of options available for future grant under our existing option plans; and

·                  47,203,000 shares or more upon conversion of our outstanding shares of convertible preferred stock and cumulative dividends in arrears.

The exercise or conversion of these securities will result in a significant increase in the number of outstanding shares and substantially dilute the ownership interests of our existing shareholders.

A substantial number of our convertible securities are convertible into shares of common stock at a conversion price of $.30 per share.  Most of these shares are eligible for public resale.  The trading price of our common stock and our ability to raise additional financing may be adversely affected by the influx into the market of such a substantial number of shares.

Our outstanding shares of Series A, B and C Convertible Preferred Stock (collectively, the “Preferred Stock”) and cumulative dividends in arrears are convertible into approximately 47,203,000 shares of common stock as of December 31, 2008, at a per share conversion price of $.30.  Although many of the shares issuable upon conversion of our Preferred Stock are eligible for public resale under Securities Exchange Commission Rule 144, we agreed to file a registration statement to cover the public resale of all of these shares.  This significant increase in the number of shares available for public sale may have a negative impact on the trading price of our shares and substantially dilute the ownership interests of our existing shareholders.  In the event that our stock trades below $.30 per share, in order to raise additional financing we would likely be required to issue additional shares of common stock or securities convertible into common stock at a purchase or conversion price, as applicable, of less than $.30 per share.  Any issuance of shares at a purchase price of less than $.30 per share would reduce the conversion price of our Preferred Stock to such lower price.  This would

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require us to issue additional shares upon conversion of our Preferred Stock and further dilute the ownership interests of our existing shareholders.  To the extent these factors are viewed negatively by the market, it may provide an incentive for persons to execute short sales of our common stock that could adversely affect the trading price of our common stock.

Applicable Securities and Exchange Commission Rules governing the trading of “penny stocks” limits the trading and liquidity of our common stock, which may affect the trading price of our common stock.

Our common stock currently trades on the OTC Bulletin Board.  Since our common stock continues to trade below $5.00 per share, our common stock is considered a “penny stock” and is subject to Securities and Exchange Commission rules and regulations, which impose limitations upon the manner in which our shares can be publicly traded.  These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks.  Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale.  These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

We do not intend to pay dividends in the foreseeable future.

We have never declared or paid a dividend on our common stock. In addition, the terms of our outstanding Preferred Stock preclude us from declaring or paying a dividend on our common stock unless a dividend is also declared or paid, as applicable, on our Preferred Stock.  We intend to retain earnings, if any, for use in the operation and expansion of our business and, therefore, do not anticipate paying any dividends on our common stock in the foreseeable future.

The trading price of our common stock may be volatile.

The trading price of our shares has from time to time fluctuated widely and in the future may be subject to similar fluctuations.  The trading price may be affected by a number of factors including the risk factors set forth in this proxy statement as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the biometrics and access control industries, and other events or factors.  Although we believe that approximately 15 registered broker dealers currently make a market in our common stock, we cannot assure you that any of these firms will continue to serve as market makers or have the financial capability to stabilize or support our common stock.  A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares.  In recent years broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations.  Such broad market fluctuations may adversely affect the future-trading price of our common stock.

Completion of the Asset Sale may result in dilution of future earnings per share to the stockholders of BIO-key.

The completion of the Asset Sale may not result in improved earnings per share of BIO-key.  The Asset Sale could fail to produce the benefits that BIO-key anticipates, or could have other adverse effects that BIO-key currently does not foresee.  In this event, the Asset Sale could result in a reduction of earnings per share of BIO-key as compared to the earnings per share that would have been achieved if the Asset Sale had not occurred.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions.  These statements may be made directly in this proxy statement, and they may also be made a part of this proxy statement by reference to other documents filed with the SEC, which is known as “incorporation by reference.”

Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements.  You should read statements that contain these words carefully.  All forward-looking statements represent present expectations of BIO-key management regarding future events, plans, objectives, expectations and intentions and are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.  These risks include, but are not limited to, the risks and uncertainties set forth in “Risk Factors” beginning on page [      ] of this proxy statement.  In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this proxy statement or in any document incorporated by reference might not occur.  Forward-looking statements also include information concerning possible or assumed future results of operations of BIO-key and its business, the expected completion and timing of the Asset Sale and other information relating to the Asset Sale.  There are forward-looking statements throughout this proxy statement, including, among others, under the headings “Summary” and “Consideration to be Received by BIO-key”.

You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this proxy statement or the date of the document incorporated by reference in this proxy statement.  We cannot guarantee any future results, levels of activity, performance or achievements.  Except as required by law, BIO-key does not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.  All subsequent forward-looking statements attributable to BIO-key, or to any person acting on its behalf, are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

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ADDITIONAL INFORMATION RELATING TO THE

SPECIAL MEETING OF THE STOCKHOLDERS OF BIO-KEY

When and Where the Special Meeting Will Be Held

The special meeting of the stockholders of BIO-key will be held at the offices of Choate, Hall & Stewart LLP, Two International Place, Boston, MA 02110 on [                    ], 2009, at [               a.m. Eastern Time].

Other Business

We are not currently aware of any business other than the named proposals to be acted upon at the BIO-key special meeting. If, however, any other matters are properly brought before the meeting, or any adjournment or postponement thereof, the persons named in the enclosed form of proxy, and acting under that proxy, will have discretion to vote or act on those matters in accordance with their best judgment.

Which Stockholders May Vote

The BIO-key board of directors has fixed the close of business on [                ], 2009 as the record date.  Only holders of record of BIO-key common stock at the close of business on the record date will be entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting.  Each share of BIO-key common stock is entitled to one vote.

At the close of business on [              ], 2009, [                        ] of our authorized common stock were issued and outstanding and held of record by [        ] stockholders.

As of the record date, the directors and executive officers of BIO-key and their affiliates held [                                ] shares of BIO-key common stock representing, approximately [                      ]% of the outstanding shares of BIO-key common stock.

How Do BIO-key Stockholders Vote

The BIO-key proxy card accompanying this proxy statement is solicited on behalf of the BIO-key board of directors for use at the special meeting.  BIO-key’s stockholders are requested to complete, date and sign the accompanying proxy card and promptly return it in the accompanying envelope or otherwise mail it to BIO-key.  BIO-key’s stockholders can also submit their proxy by telephone or the Internet.  All proxies that are properly executed and returned, or submitted by telephone or the Internet, and that are not revoked, will be voted at the special meeting in accordance with the instructions indicated thereon.  Executed or submitted but unmarked proxies will be voted FOR approval of all of the proposals listed on the proxy card.

Quorum and Vote Required to Approve Each Proposal

The presence at the meeting, in person or by proxy, of the holders of a majority of the issued and outstanding shares of common stock entitled to vote at the special meeting will be necessary to constitute a quorum.

Voting requirements for the approval of the Asset Sale proposal.    Assuming a quorum is present, approval of the Asset Sale proposal will require the affirmative vote of the holders of a majority of the outstanding shares of the BIO-key common stock.

Voting requirements for the adjournment proposal.    Assuming a quorum is present, the approval of the adjournment proposal will require the affirmative vote of the holders of a majority of the outstanding shares of BIO-key common stock present, either in person or by proxy, and entitled to vote at the special meeting.

Abstentions; Broker Non-Votes

The inspector of elections at BIO-key’s special meeting will treat abstentions and shares represented by proxies that reflect abstentions as shares that are present and entitled to vote for the purpose of determining the presence of a quorum and as having voting power for the purpose of determining the outcome of any matter submitted to BIO-key’s stockholders for a vote.  Abstentions will have the effect of votes against any proposal to be considered at the special meeting.

Broker non-votes occur when a broker holding stock in street name does not vote the shares on some or all matters.  Brokers are permitted to vote on routine, non-controversial proposals in instances where they have not received voting instruction from the beneficial owner of the stock but are not permitted to vote on non-routine matters.  Uncast votes on non-routine matters are referred to

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as “broker non-votes.”  The inspector of elections will treat broker non-votes as shares that are present and entitled to vote for the purpose of determining the presence of a quorum.  However, for the purpose of determining the outcome of any matter as to which the broker or nominee has indicated on the proxy that it does not have discretionary authority to vote, the inspector of elections will be required to treat those shares as not having voting power with respect to that matter (even though their shares may represent voting power with respect to other matters, such as routine matters).  Broker non-votes will not be considered to have been voted for or against the approval of the Asset Sale proposal.  However, because the votes required to approve the Asset Sale proposal are based on a percentage of the total number of shares outstanding, rather than as a percentage of the voting power represented at the meeting, broker non-votes will have the effect of a vote against those proposals.  Broker non-votes will have no effect on the adjournment proposal.

Revocability of Proxies

Stockholders of record who execute proxies may revoke them by giving written notice to, or by signing and delivering a new, valid proxy bearing a later date to, BIO-key’s Secretary at any time before such proxies are voted.  Stockholders who submit a proxy by telephone or the Internet can revoke them by submitting another proxy by telephone or the Internet at any time before such proxy is voted.  Attendance at the special meeting will not have the effect of revoking a proxy unless the stockholder attending the special meeting notifies the Secretary, in writing, of the revocation of the proxy at any time prior to the voting of the shares represented by the proxy.  If a stockholder’s shares are held in “street name,” the stockholder must contact its broker, bank or other nominee to change its vote.

Solicitation of Proxies and Expenses of Solicitation

BIO-key will bear the costs of printing, filing and mailing this proxy statement.  BIO-key will also bear the costs of holding the special meeting and the cost of soliciting proxies.  In addition to solicitation by mail, BIO-key’s directors, officers and regular employees (who will not be specifically compensated for such services) may solicit proxies by telephone, facsimile, e-mail and personal meetings.  BIO-key has retained StockTrans, Inc. to aid in the solicitation of proxies from stockholders for an estimated initial retainer of $5,000, plus additional out-of-pocket expenses.  The extent to which these proxy soliciting efforts will be necessary depends entirely upon how promptly proxies are received.  You should send in your proxy by mail without delay or vote by telephone or using the Internet.  We also reimburse brokers and other custodians, nominees and fiduciaries for their expenses in sending these materials to you and getting your voting instructions.  A more complete description of how to send your proxy is included on the proxy accompanying this proxy statement.

Dissenters’ Rights

Under Delaware law, holders of our common stock are not entitled to appraisal rights with respect to the matters to be considered at the BIO-key special meeting.

Internet Availability of Proxy Materials

These proxy solicitation materials were first mailed on or about [              ], 2009 to all stockholders entitled to vote at the BIO-key special meeting.  Pursuant to the rules recently adopted by the Securities and Exchange Commission, we are permitted to provide access to our proxy material over the Internet instead of mailing a printed copy of the proxy material to each stockholder.

Because we have elected to utilize the “full set delivery” option, we are delivering our proxy materials to our stockholders under the “traditional” method by providing paper copies as well as providing access to our proxy materials on a publicly accessible Web site.  Our proxy statement and proxy are available at www.[                    ].

Assistance

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact BIO-key or its proxy solicitor StockTrans, Inc.

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PROPOSAL ONE — THE ASSET SALE PROPOSAL

The following is a description of the material aspects of the Asset Sale, including the Asset Purchase Agreement.  While BIO-key believes that the following description covers the material terms of the Asset Sale and the Asset Purchase Agreement, the description may not contain all of the information that is important to you.  In particular, the following summary of the Asset Sale proposal and the Asset Purchase Agreement is not complete and is qualified in its entirety by reference to the copies of the related documents attached to this proxy statement as Annex A through Annex D.  BIO-key encourages you to read carefully this entire proxy statement and the other documents to which we refer, including the Asset Purchase Agreement attached to this proxy statement as Annex A, for a more complete understanding of the Asset Sale proposal.

Background of the Asset Sale

On March 30, 2004, BIO-key acquired Public Safety Group, Inc., which we refer to as PSG, a privately held company focused on wireless solutions for law enforcement and public safety markets.  PSG’s primary technology is PocketCop™, a handheld solution that provides mobile officers, such as detectives who are not typically in their vehicles, a hand-held mobile information software solution.

On August 30, 2004, BIO-key completed a transaction with Aether Systems, Inc., a leading provider of wireless data solutions, to purchase its Mobile Government Division, whose customers were public safety organizations - primarily state and local police, fire and rescue and emergency medical services organizations.  These two acquisitions formed the basis for BIO-key’s Law Enforcement Division.

In 2006, BIO-key began seeing changing market conditions such that (i) the mobile market was maturing and becoming a slow growth market; (ii) customers were increasingly looking for complete end-to-end public safety technology solutions, not just a series of stand-alone applications; and (iii) the hand-held market, which offered significant growth potential, was still several years away from achieving revenue mass.  As a result, BIO-key began having conversations with a number of companies regarding potential relationships, whether they be strategic partnerships, sales or acquisitions to strategically enhance the Law Enforcement Division’s competitive position.

After conducting several interviews and considering several different investment bankers, Kaufman Bros. L.P. (referred to as “Kaufman Bros.”) was retained on April 6, 2006 to advise BIO-key on a broad range of issues, including strategic opportunities for the Law Enforcement Division.  Kaufman Bros. identified a number of potential transaction partners with which BIO-key management had discussions of varying length and seriousness.  Efforts were made to solicit indications of interest from potential acquirors, both strategic and financial, following the retention of Kaufman Bros through 2008.  The BIO-key board also considered a private placement of securities or the issuance of non-convertible debt and but these alternatives were ultimately rejected by the BIO-key board because they would have required significant ongoing dividend or interest obligations.

One of the companies with which BIO-key management engaged in discussions was InterAct911 Mobile Systems, Inc., which we refer to as InterAct, an affiliate of a company BIO-key had previously worked cooperatively with in certain customer selling situations because such affiliate’s CAD/RMS products could be integrated with BIO-key’s mobile solutions.  For more than a year, the two companies had on and off discussions about a business combination.  The discussions ebbed and flowed with varying levels of interest and ultimately discussions terminated in 2008.

On February 19 and 20, 2009, a regularly scheduled quarterly directors’ meeting was expanded into a two-day retreat held at BIO-key’s offices.  In attendance were all of BIO-key’s directors, its legal counsel and a representative from Kaufman Bros.  The purpose of this expanded meeting was to conduct an in-depth operational review of BIO-key’s business for the year just ended and to review the forecast and budget for 2009.  Additionally, extensive discussions took place with respect to the objectives for management to use in considering any transaction involving the Law Enforcement Division.

In early spring of 2009, discussions between InterAct and Bio-key resumed, but the nature of a potential transaction changed from a potential business combination to the sale of the Law Enforcement Division to InterAct.  On April 3, 2009, InterAct presented BIO-key with a term sheet to purchase the Law Enforcement Division.  BIO-key’s board of directors rejected the offer because it did not consider the aggregate proposed purchase price to be adequate.

After consulting with the board of directors of BIO-key, Thomas J. Colatosti, Board Chair, contacted Matt Roszak, Chief Financial Officer of SilkRoad Equity, LLC, the majority owner of InterAct (referred to as “SilkRoad”), to inform him of BIO-key’s decision.  These two individuals became the primary interfaces between the two companies on this transaction.  Between April 20, 2009 and May 22, 2009, Messrs. Colatosti and Roszak exchanged various proposals as to the material transaction terms including the total price, length and terms of the deferred payment, number and price of warrants that would be issued and closing adjustments.

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On May 22, 2009, InterAct submitted a term sheet to BIO-key in which the aggregate consideration would be $11,000,000, of which $7,000,000 would be paid at closing and $4,000,000 would be paid over three years.  SilkRoad would also be issued a warrant to purchase 9.9% of BIO-key’s common stock at $.30 per share.

The BIO-key board of directors meet telephonically on May 22, 2009 and approved the proposed fundamental pricing terms to sell the Law Enforcement Division to InterAct.  Mr. Colatosti was asked to work with counsel to finalize the other aspects of the term sheet.

Between June 1, 2009 and June 11, 2009, legal counsel for both companies exchanged several versions of the term sheet.

On June 11, 2009, a term sheet reflecting input from the parties’ respective counsel and signed by InterAct was presented to BIO-key.  On that day, the term sheet was transmitted to the BIO-key board of directors.  After discussion, on June 11, 2009, the BIO-key directors approved the term sheet, which Mr. Colatosti was authorized to execute on behalf of BIO-key.

Immediately thereafter, the due diligence process began whereby BIO-key provided InterAct with substantial financial, contract, customer and personnel data.  BIO-key also conducted its own due diligence on InterAct, including a financial review of InterAct and  SilkRoad.  BIO-key also interviewed InterAct’s two other primary owners, Foundation Equity and Bay Capital.  BIO-key also interviewed SilkRoad’s banker and auditor.

In parallel to the due diligence process, the two companies and their legal counsel negotiated an Asset Purchase Agreement during late July and early August of 2009.  During this process, SilkRoad agreed to guarantee the deferred portion of the purchase price.  On August 13, 2009, the BIO-key board of directors convened and negotiated the form of Asset Purchase Agreement and reviewed and discussed the fairness opinion of Kaufman Bros.  The board of directors of BIO-key unanimously authorized the execution of the Asset Purchase Agreement which took place later that same day.

BIO-key’s Reasons for the Asset Sale

In approving the Asset Sale pursuant to the terms of the Asset Purchase Agreement and recommending that the BIO-key stockholders approve the Asset Sale proposal, the BIO-key board of directors considered a number of factors, including those listed below.  The BIO-key board of directors believes that the Asset Sale and the Asset Purchase Agreement are advisable and in the best interests of BIO-key and its stockholders.  Among the factors that the BIO-key board of directors considered are the following:

·                  In 2007, the Company began seeing changing market conditions such that (i) the mobile market was maturing and was becoming a slow growth market; (ii) customers were increasingly looking for complete end-to-end public safety technology solutions,  not just a series of  best-in-class applications; and (iii) the hand-held market, which offered significant growth potential, was still several years away from achieving revenue mass.  As a result, BIO-key began having numerous conversations with several companies regarding potential relationships, including but not limited to partnerships, sales, merger or acquisitions, to strategically enhance the Law Enforcement Division’s competitive positioning.

·                  In 2009, the Company saw an important uptick in the potential of its biometric business.  The Company realized that it lacked the resources to invest in both the Law Enforcement business and the Biometrics business at the same time and to also redeem its outstanding convertible preferred stock.

·                  BIO-key believed that its public market value was being constrained because of (i) the high dividend rate of the convertible preferred stock and its negative impact on the Company’s balance sheet; and (ii) the preference and number of shares of convertible preferred stock, which, as a practical matter, prohibited the Company from raising new financing to meet the investment needs of both the Law Enforcement and Biometric businesses.

·                  Therefore, the rationale of BIO-key’s board of directors to sell the Law Enforcement business was largely based on the board of directors’ desire to satisfy the obligations due to holders of the Company’s convertible preferred stock, to unlock the value in the Company’s common stock and to obtain the necessary cash to invest in the Biometrics business.

The BIO-key board of directors also considered a variety of risks and other potentially negative factors applicable to the Asset Sale.  In addition to the proposed Asset Sale with InterAct, the board of directors of the Company considered similar but less attractive transactions with other third parties.  Additionally, the board of directors of the Company considered redeeming the Company’s convertible preferred stock by reducing the conversion price to a price that was discounted to market and converting the  

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shares of convertible preferred stock to common stock.  This action would likely have added more than 100 million shares to our capital structure and would therefore have significantly diluted common shareholders.  The board of directors of BIO-key realized, however, that even such prohibitively expensive alternative may not have been approved by the holders of convertible preferred stock because the dilutive effect of such conversion could dramatically erode the price and liquidity of the Company’s common stock.

Risks of the Asset Sale

The foregoing summarizes those material factors and risks considered by the BIO-key board of directors but it is in no way meant to be exhaustive of the discussion and information considered by the board of directors.  In view of its many considerations, the BIO-key board of directors did not quantify or otherwise assign relative significance to each factor considered.  In addition, each member of the board of directors may have given different significance to various factors.  The BIO-key board of directors concluded that the potential benefits of the Asset Sale on the terms of the Asset Sale Purchase Agreement outweighed the potential risks of the transaction and that, overall, the proposed Asset Sale had greater potential benefits to BIO-key, its stockholders and other stakeholders than other strategic alternatives currently available to BIO-key.

After discussing and evaluating all of these considerations, the BIO-key board of directors:

·                  determined that the Asset Purchase Agreement, the Asset Sale and other transactions contemplated thereby are fair to BIO-key and in the best interests of BIO-key and its stockholders;

·                  approved and adopted the Asset Purchase Agreement, the Asset Sale and the other transactions contemplated thereby in accordance with the requirements of Delaware General Corporation Law; and

·                  resolved to recommend that BIO-key’s stockholders approve the Asset Sale pursuant to the terms of the Asset Purchase Agreement.

Recommendation of the BIO-key Board of Directors

For the reasons set forth above, the BIO-key board of directors believes that the Asset Sale is in the best interests of BIO-key and its stockholders and recommends that the stockholders vote FOR the approval of the Asset Sale pursuant to the terms of the Asset Purchase Agreement.

Opinion of Kaufman Bros. L.P. to the Board of Directors of BIO-key

BIO-key engaged Kaufman Bros. L.P., or Kaufman Bros., to render an opinion as to the fairness, from a financial point of view, of the aggregate purchase price to be received by BIO-key’s stockholders in the sale, as part of the Asset Sale, of substantially all of the assets of BIO-key’s Law Enforcement Division.  Separately, BIO-key previously engaged, and Kaufman Bros. currently serves, as BIO-key’s financial advisor with respect to the Asset Sale.  On August 13, 2009, Kaufman Bros. delivered its oral opinion to the Chairman of the Board of Directors of BIO-key, subsequently followed by delivery of a written opinion to the BIO-key board of directors, to the effect that, as of August 13, 2009, and based upon and subject to the qualifications, limitations and assumptions set forth in the opinion, the aggregate purchase price to be received by the stockholders in the Asset Sale is fair, from a financial point of view, to BIO-key’s stockholders.

This summary of Kaufman Bros.’ written opinion is qualified in its entirety by reference to the full text of Kaufman Bros.’ written opinion, dated August 13, 2009, and attached to this proxy statement as Annex B.  You are urged to, and should, read Kaufman Bros.’ written opinion carefully and in its entirety.  Kaufman Bros.’ written opinion addresses only the fairness, from a financial point of view, of the aggregate purchase price to be received by the stockholders in the Asset Sale, as of the date of Kaufman Bros.’ written opinion.  The opinion of Kaufman Bros. was provided for the information and assistance of the BIO-key board of directors in connection with its consideration of the Asset Sale.  The opinion of Kaufman Bros. does not address any other aspect of the Asset Sale and does not constitute a recommendation to any securityholder as to how such securityholder should vote or act with respect to any matters relating to the Asset Sale or otherwise.  The form and amount of consideration payable in the Asset Sale were determined through negotiations between BIO-key and InterAct, and were approved by the board of directors of BIO-key.  Kaufman Bros.’ opinion was among many factors that the board of directors took into consideration in making its determination to approve the Asset Sale.

Material and Information Considered with Respect to the Asset Sale

In arriving at its opinion, Kaufman Bros., among other things:

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(i)                                     reviewed an unexecuted draft of the Asset Purchase Agreement, dated August 12, 2009, relating to the Asset Sale;

(ii)                                  reviewed certain information furnished to Kaufman Bros. by BIO-key’s management, including financial forecasts and analyses, relating to the business, operations and prospects of the Law Enforcement Division;

(iii)                               held discussions with members of BIO-key’s senior management concerning the matters described in clauses (i) and (ii) above and certain other matters Kaufman Bros. believed necessary or appropriate to its inquiry;

(iv)                              compared the results of operations of the Law Enforcement Division with that of certain publicly traded companies which Kaufman Bros. deemed to be reasonably similar to the Law Enforcement Division;

(v)                                 compared the proposed financial terms of the Asset Sale with the financial terms of certain other transactions that Kaufman Bros. deemed relevant; and

(vi)                              conducted such other financial studies, analyses and investigations as Kaufman Bros. deemed appropriate.

The opinion also reflects Kaufman Bros.’ familiarity, developed in the course of serving as financial advisor to BIO-key since June 2008, with BIO-key’s business and prospects, as well as prevailing trends in the markets in which BIO-key participates.

In connection with its review, Kaufman Bros. did not assume any responsibility for independent verification of any of the information utilized in its analyses and relied upon and assumed the accuracy and completeness of all of the financial, accounting, tax and other information that was available to Kaufman Bros. from public sources, that was provided to it by BIO-key, or that was otherwise reviewed by Kaufman Bros.  With respect to financial projections provided to Kaufman Bros. by BIO-key, Kaufman Bros. assumed that such financial projections were reasonably prepared in good faith, reflecting the best currently available estimates and judgments of the management of BIO-key, as to the future operating and financial performance of the Law Enforcement Division.  Kaufman Bros. assumed no responsibility for and expressed no view or opinion as to such forecasts or the assumptions on which they are based.

Kaufman Bros. also assumed, with BIO-key’s consent, that the Asset Sale would be consummated in accordance with the terms and conditions set forth in the unexecuted draft Asset Purchase Agreement and certain related documents that it reviewed.  Kaufman Bros. neither conducted a physical inspection of the properties and facilities of BIO-key nor made or obtained any evaluations or appraisals of the assets or liabilities of BIO-key.  In addition, Kaufman Bros. did not conduct any analysis concerning the solvency of BIO-key.  Kaufman Bros.’ opinion addressed only the fairness, from a financial point of view, of the aggregate purchase price to be received by the stockholders in the Asset Sale, and did not address any other aspect or implication of the Asset Sale or any other agreement, arrangement or understanding entered into in connection with the Asset Sale or otherwise.

Kaufman Bros.’ opinion is necessarily based upon information made available to it as of the date of its opinion, and upon financial, economic, market and other conditions as they existed and could be evaluated on the date of Kaufman Bros.’ opinion.  Kaufman Bros.’ opinion did not address the relative merits of the Asset Sale as compared to other business strategies that might be available to BIO-key, nor did it address BIO-key’s underlying business decision to proceed with the Asset Sale.  Kaufman Bros.’ opinion did not express any opinion as to any tax or other consequences that might result from the Asset Sale, nor did its opinion address any legal, tax, regulatory or accounting matters.

In preparing its opinion, Kaufman Bros. performed a number of financial and comparative analyses, including those further described below.  The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description.  Kaufman Bros. believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading view of the processes underlying its opinion.

No company or transaction used in the analyses performed by Kaufman Bros. as a comparison is identical to BIO-key or the contemplated Asset Sale.  In addition, Kaufman Bros. may have given some analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuation resulting from any particular analysis described below should not be taken to be Kaufman Bros.’ view of the actual value of the Law Enforcement Division.  The analyses performed by Kaufman Bros. are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses.  In addition, analyses relating to the value of businesses or assets do not purport to be appraisals or to necessarily reflect the prices at which businesses or assets may actually be sold.  The analyses performed were prepared solely as part of Kaufman Bros.’ analysis of the fairness, from a financial point of view, of the aggregate purchase price to be received by the stockholders in the Asset Sale, and were provided to the board of directors in

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connection with the delivery of Kaufman Bros.’ opinion.

In reaching the conclusions presented in its opinion, Kaufman Bros. did not receive any instructions from BIO-key in terms of what conclusions it should reach, and BIO-key did not impose any limitation on Kaufman Bros. on the scope of its investigation in preparation of the opinion.

Valuation Methods and Analyses

The following is a summary of material financial analyses performed by Kaufman Bros. in connection with its oral opinion presented to the Chairman of the Board of Directors of BIO-key on August 13, 2009 and the preparation of its written opinion to the board of directors dated August 13, 2009.  Certain of the following summaries of financial analyses that were performed by Kaufman Bros. include information presented in tabular format.  In order to understand fully the material financial analyses that were performed by Kaufman Bros., the tables should be read together with the text of each summary.  The tables alone do not constitute a complete description of the material financial analyses.  The Kaufman Bros. opinion is based on the totality of the various analyses performed by Kaufman Bros., and no particular portion of the analyses has any merit standing alone.

Comparable Public Company Analysis.  Kaufman Bros. performed a comparable public company analysis, which is intended to provide an implied value of a company by comparing certain financial information of the Law Enforcement Division with corresponding financial information of similar public companies.  Kaufman Bros. selected companies whose stock was publicly traded, that shared similar business characteristics with the Law Enforcement Division’s business, and for which relevant financial information was available publicly.  Specifically, Kaufman Bros. selected publicly traded companies that operated primarily in the public safety software sectors.  Kaufman Bros. excluded companies that may have offered services similar to the Law Enforcement Division, but that also derived a large part of their revenues from businesses dissimilar to Law Enforcement Division.  No company utilized in the comparable company analysis is identical to the Law Enforcement Division.

For purposes of this analysis, Kaufman Bros. utilized financial information obtained from publicly available information and Wall Street research consensus estimates as of August 12, 2009 for each company listed below.  In this analysis, Kaufman Bros. considered various financial data including enterprise values (calculated as fully diluted market capitalization, plus book value of total debt, preferred stock and minority interest, and less cash and cash equivalents) as a multiple of estimated revenue and EBITDA (calculated as earnings before interest, taxes, depreciation, amortization and stock-based compensation), but focused on enterprise values as a multiple of revenue for the last twelve months (LTM) and calendar years (CY) 2009 and 2010.

Kaufman Bros. noted that the analysis indicated the implied mean, median, high, and low multiples for the sector of companies as a group as presented in the table below.

Kaufman Bros. applied this range of multiples to the Law Enforcement Division’s revenue for the comparable periods based on management’s estimates and added the Law Enforcement Division’s net cash balance to derive an implied equity value for the Law Enforcement Division as follows:

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Kaufman Bros. noted that the aggregate purchase price of $11,000,000 was within or above the range of implied values derived by the comparable public company analysis.

Comparable Precedent Transaction Analysis.  Kaufman Bros. also performed a comparable precedent transaction analysis, which is intended to provide an implied value of a company based on publicly available financial terms of selected transactions that share certain characteristics with the Asset Sale.  In connection with its analysis, Kaufman Bros. compared publicly available statistics for transactions that were completed between January 1, 2000 and August 12, 2009 in which the target company operated in the public safety software sector and whose transaction values were between $10 million and $2 billion.  Kaufman Bros. selected these precedent transactions because the target companies were in the same sector as the Law Enforcement Division and because the precedent transaction values were comparable in size to the Asset Sale.  Kaufman Bros. excluded transactions whose targets may have offered services similar to the Law Enforcement Division, but who also derived a large part of their revenues from businesses dissimilar to the Law Enforcement Division.  No company or transaction utilized in the precedent transaction analysis is identical to the Law Enforcement Division or the Asset Sale.

For each transaction, Kaufman Bros. considered various financial data including (i) the ratio of the transaction value to the last twelve month’s revenue, where available, of the acquired company and (ii) the ratio of the transaction value to the last twelve month’s EBITDA, where available, of the acquired company, but focused on the ratio of the transaction value to the last twelve month’s revenue, where available, of the acquired company.

Based on the analysis, Kaufman Bros. selected ranges of multiples of the comparable precedent transactions below:

Kaufman Bros. then applied this range of multiples to the Law Enforcement Division’s revenue for the comparable period and added the Law Enforcement Division’s net cash balance to derive an implied equity value for the Law Enforcement Division as follows:

Kaufman Bros. noted that the aggregate purchase price of $11,000,000 was within or above the range of implied values

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derived by the comparable precedent transaction analysis.

Discounted Cash Flow Analysis.  Kaufman Bros. performed a discounted cash flow analysis to calculate the estimated present value of the unlevered, after-tax free cash flows that the Law Enforcement Division could generate over the period from the second half of 2009 through 2013.  In connection with this analysis, Kaufman Bros. calculated a range of present equity values for the Law Enforcement Division.  Kaufman Bros. used certain projected financial performance estimates for the fiscal years ending 2009 through 2013 based on internal estimates that BIO-key’s management provided to Kaufman Bros.

Kaufman Bros. calculated the projected unlevered free cash flows for the Law Enforcement Division for 2009 through 2013.  Kaufman Bros. then calculated ranges of estimated terminal values based on the perpetual growth of calendar year 2013 estimated free cash flow of $0.7 million using selected unlevered free cash flow growth rate percentages ranging from 2.5% to 3.5%.  The amounts were discounted to present value using discount rates of 14% to 18%.  Kaufman Bros. then added the estimated ranges of present values of unlevered free cash flows to the ranges of estimated terminal values and to the Law Enforcement Division’s cash balance as of June 30, 2009 to derive illustrative ranges of implied present equity values for the Law Enforcement Division.  This analysis indicated the following implied equity reference range for the Law Enforcement Division, as compared to the Asset Sale consideration:

Kaufman Bros. noted that the aggregate purchase price of $11,000,000 was within or above the range of implied values derived by the discounted cash flow analysis based on management projections.

Other Factors.  In rendering its opinion, Kaufman Bros. also reviewed and considered other factors, including (i) the working capital adjustments factored into the Asset Sale and (ii) the inclusion and value of the Warrant to purchase BIO-key common stock to be issued to SilkRoad in the Asset Sale.

General

Pursuant to an engagement letter dated July 30, 2009, the BIO-key board of directors engaged Kaufman Bros. to deliver its opinion as to the fairness, from a financial point of view, of the aggregate purchase price to be received by the BIO-key stockholders in the Asset Sale.  Kaufman Bros. was selected by the board of directors of BIO-key based on Kaufman Bros.’ reputation as a recognized investment banking firm with experience in the small cap technology market.  Additionally, Kaufman Bros. showed an excellent understanding of BIO-key’s business and demonstrated a strong and sincere interest in working with BIO-key.  Kaufman Bros., as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, private placements and related financings, bankruptcy reorganizations and similar recapitalizations, negotiated underwritings, secondary distributions of listed and unlisted securities, and valuations for corporate and other purposes.  Separately from the fairness opinion engagement, Kaufman Bros. has served and continues to serve as financial advisor to BIO-key, pursuant to a previous engagement letter dated June 9, 2008, in connection with the Asset Sale.  In the ordinary course of its business as a broker-dealer and market maker, Kaufman Bros. may have long or short positions, either on a discretionary or nondiscretionary basis, for its own account or for those of its clients, in the securities of BIO-key.  The opinion was reviewed and approved by Kaufman Bros.’ fairness opinion committee.

Pursuant to the terms of the engagement letter dated July 30, 2009, Kaufman Bros. is due a cash fee of $25,000 upon delivery of its opinion to the board of directors.  No portion of the opinion fee is contingent upon either the conclusion expressed in the opinion or whether the Asset Sale is successfully consummated.  Separately, pursuant to the terms of the engagement letter dated June 9, 2008, Kaufman Bros. is due a cash fee equal to 4.0% of the aggregate purchase price in the Asset Sale (assuming an aggregate purchase price of $11,000,000), conditioned upon the consummation of the Asset Sale.  BIO-key has also agreed to reimburse Kaufman Bros.’ reasonable out-of-pocket expenses, including reasonable fees and expenses of its legal counsel, and to indemnify Kaufman Bros. and related parties against certain liabilities arising out of that engagement, including liabilities under the federal securities laws, relating to, or arising out of, its engagement.  The terms of the fee arrangements with Kaufman Bros., both with respect to the June 9, 2008 engagement letter and the July 30, 2009 engagement letter, are customary in transactions of this nature, were negotiated at arm’s length between BIO-key and Kaufman Bros., and the BIO-key board of directors was aware of such fee arrangements.

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Purpose of the Asset Sale

The cash payment to BIO-key that is a part of the Asset Sale will be used by BIO-key to redeem outstanding shares of the Company’s convertible preferred stock and for working capital purposes.

Effects of the Asset Sale

If the Asset Sale and the Asset Purchase Agreement are approved by our stockholders and the other conditions to closing are satisfied, we expect that our primary operational focus will be on our advanced fingerprint identification biometric technology and software solutions.  BIO-key’s public reporting obligations and the listing of our common stock on the OTC Bulletin Board will not be affected as a result of completing the Asset Sale.

The BIO-key board believes, as evidenced by the Company’s recent award by Lockheed Martin to provide its fingerprint technology for the FBI’s Next Generation Identification system, that its biometrics solutions have gained market acceptance and that this sector presents significant opportunities for growth.  Nevertheless, the overall size of the biometrics market remains uncertain and BIO-key will continue to face challenges from a variety of competitors including those with greater resources than BIO-key.  See Risk Factors Relating to BIO-key beginning on page [14] of the Proxy Statement.

If the Asset Sale is not approved by our stockholders and therefore not completed, we will seek to continue to develop the Law Enforcement Division as well as to consider and evaluate other strategic opportunities.  There can be no assurances that our development of the Law Enforcement Division or any alternative strategic opportunities will result in the same or greater value to shareholders as the proposed Asset Sale.

Relationship between BIO-key and InterAct

BIO-key and InterAct Public Safety Systems, an affiliate of InterAct, have collaborated on several commercial projects in the past, including commercial arrangements in which products used in the Law Enforcement Division (including elements of the MobileCop®, PocketCop®, MobileRescue™, MobileOffice™, and InfoServer™ product lines) have been integrated with those of InterAct Public Safety Systems and sold to law enforcement agencies and other emergency response customers.  Outside of those commercial dealings, there are no material relationships among BIO-key and InterAct or any of their respective affiliates other than in respect of the Asset Purchase Agreement and the related ancillary agreements.

Interests of Executive Officers and Employees of BIO-key in the Asset Sale

When considering the recommendation of the BIO-key board of directors regarding the Asset Sale proposal, some of BIO-key’s executive officers have interests in the Asset Sale that are different from, or in addition to, any interest they may have as BIO-key stockholders.

On October 4, 2008, BIO-key renewed its year-to-year employment agreement with Kenneth Souza to serve as Executive Vice President and General Manager, Law Enforcement of the Company.  InterAct has agreed to assume BIO-key’s obligations to Mr. Souza under that employment agreement following the Asset Sale and it is anticipated that Mr. Souza will become an employee of InterAct.

As of August 1, 2009, Mr. Souza beneficially owned five hundred fifty thousand (550,000) options of BIO-key, which are fully-vested.  Three hundred thousand (300,000) of the options are exercisable at the price of $1.05 per share while the remaining two hundred fifty thousand (250,000) options are exercisable at the price of $0.75 per share.  As of August 1, 2009, certain employees of BIO-key who will be transferred to InterAct911 as part of the Asset Sale also held an aggregate of 787,331 options of BIO-key.  Generally, an optionholder has 90-days after his employment relationship with BIO-key terminates to exercise his vested options.  The board of directors of BIO-key may determine, in the future, that (i) Mr. Souza and such transferred employees will have an extended period of time in which to exercise their vested options and (ii) the unvested options of the transferred employees will continue to vest until such options are fully vested and/or the extended time period has elapsed.

The BIO-key board of directors was aware of these interests and took them into account in its deliberations of the merits of the Asset Sale and the Asset Purchase Agreement and in approving the Asset Sale and the Asset Purchase Agreement.

Dissenters’ Rights

There will be no change in your rights as a stockholder as a result of the Asset Sale.  Delaware law does not provide for appraisal or other similar rights for dissenting stockholders in connection with the Asset Sale, and we do not intend to independently provide stockholders with any such right.  Our shares of common stock will remain publicly traded on the OTC Bulletin Board following the closing of the Asset Sale.

Dilution of  Existing BIO-key Stockholders

If the Asset Sale is completed and if SilkRoad were to exercise its right to exercise its Warrant to purchase 8,000,000 shares of BIO-key common stock, the shareholdings of the current BIO-key stockholders will be proportionately diluted due to the issuance

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of an additional 8,000,000 shares of BIO-key’s common stock to SilkRoad.

Material United States Federal Income Tax Consequences of the Asset Sale

The discussion set forth below summarizes the material United States federal income tax consequences of the Asset Sale.  This discussion is based on the Internal Revenue Code, existing and proposed Treasury regulations thereunder and administrative rulings and court decisions, all as in effect on the date of this proxy statement and all of which are subject to change or differing interpretations (possibly with retroactive effect).  Any such change or differing interpretation could alter the tax consequences described herein.

This discussion is not a complete description of all the United States federal income tax consequences that may be relevant to the Asset Sale.  In addition, the following discussion does not address the tax consequences of the Asset Sale under foreign, state or local tax laws, the tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the Asset Sale (whether or not any such transactions are undertaken in connection with the Asset Sale), including without limitation the tax consequences of the issuance, exercise or disposition of the Warrant or the redemption of outstanding shares of BIO-key’s convertible preferred stock.  Neither BIO-key nor InterAct has requested, nor will request, a ruling from the Internal Revenue Service with regard to any of the tax consequences of the Asset Sale.

Material United States Federal Income Tax Consequences to BIO-key of the Asset Sale

The Asset Sale will be treated as a taxable asset sale, with BIO-key as the seller and InterAct as the buyer.  Accordingly, BIO-key will generally recognize taxable gain or loss in the transaction with respect to each asset that it sells to InterAct, computed in each case as the fair market value of the consideration (including liabilities assumed) allocable to such asset less the adjusted tax basis of such asset sold.  BIO-key expects to recognize taxable gain on the Asset Sale.  Although BIO-key has net operating loss carryforwards that potentially could offset a portion of such gain, such loss carryforwards could be unavailable, in whole or in part, to offset such gain due to potentially applicable limitations under the Internal Revenue Code.

Material United States Federal Income Tax Consequences to BIO-key Stockholders of the Asset Sale

The Asset Sale, by itself, will have no material United States federal income tax consequences to BIO-key’s existing stockholders as such.  Therefore, holders of BIO-key stock will not recognize a tax gain or tax loss upon consummation of the Asset Sale.

Regulatory Matters

Mergers and acquisitions that may have an impact on commerce in the United States are subject to review by the Department of Justice, referred to as the Antitrust Division, and the Federal Trade Commission, referred to as the FTC, to determine whether they comply with applicable antitrust laws.  BIO-key does not believe that the Asset Sale is subject to premerger review by any governmental authorities under the antitrust laws of the jurisdictions where BIO-key and InterAct conduct business.

Nevertheless, even after completion of the Asset Sale, the Antitrust Division, the FTC, or any other United States or foreign governmental authority could challenge or seek to unwind the Asset Sale under the antitrust laws as it deems necessary or desirable in the public interest.  Moreover, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin or unwind the Asset Sale before or after it is completed.

Accounting Treatment

In accordance with accounting principles generally accepted in the United States, InterAct will account for the Asset Sale using the acquisition method of accounting for business combinations.  InterAct will allocate the purchase price to the net tangible and intangible assets acquired based on their respective fair values at the date of the completion of the Asset Sale.  Any excess of the purchase price over those fair values will be recorded as goodwill.

Our Public Accountants — Presence at the Special Meeting

Representatives of CCR LLP, our public accountants, are expected to be present, and to be available to respond to appropriate questions, at the special meeting.  They will have the opportunity to make a statement if they desire to do so; they have indicated that, as of the date of this proxy statement, they do not.

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PROPOSAL ONE - ASSET SALE

The following summary describes the material provisions of the Asset Purchase Agreement.  The provisions of the Asset Purchase Agreement are complicated and not easily summarized.  This summary may not contain all of the information about the Asset Purchase Agreement that is important to you.  The Asset Purchase Agreement is attached to this proxy statement as Annex A and is incorporated by reference into this proxy statement, and we encourage you to read it carefully in its entirety for a more complete understanding of the Asset Purchase Agreement.

The Asset Sale

Acquired assets.    The Asset Purchase Agreement provides for the sale of substantially all of the assets of the Law Enforcement Division to InterAct911 Mobile Systems, Inc., or InterAct, a Delaware corporation and wholly-owned subsidiary of InterAct911 Corporation.  The assets to be acquired include BIO-key’s customer contracts, intellectual property, accounts receivables, equipment, inventories, software, technologies, communication systems and goodwill relating to its Law Enforcement Division.  In addition, it is anticipated that BIO-key’s lease for its office in Marlborough, Massachusetts will be assigned to InterAct.

Excluded assets.    The assets excluded under the Asset Purchase Agreement include the rights of BIO-key under or pursuant to the terms of the Asset Purchase Agreement and the related ancillary documents; BIO-key’s general ledger, accounting records, minute books and corporate seal; BIO-key’s personnel records and any other records that BIO-key is required by law to retain in its possession; any right to receive mail and other communications addressed to BIO-key relating to any excluded asset or excluded liability that is not being transferred to InterAct as part of the Asset Sale; the capital stock of BIO-key or any of its subsidiaries; cash and cash equivalents, bank accounts; and trademarks relating to the words “BIO-key” or “BIO-key International;” and any refund, abatement or tax credit of, and all other assets comprising receivables or deferred assets or prepayments for, taxes arising or resulting from BIO-key’s conduct of the Law Enforcement Division or ownership of the assets to be purchased by InterAct for taxable periods ending on or before the closing date.

Assumed liabilities.    The Asset Purchase Agreement provides that, in addition to acquiring the assets of BIO-key set forth in the Asset Purchase Agreement, InterAct will assume certain specified liabilities of the Law Enforcement Division.  The liabilities to be assumed include those accounts payable and accrued and unused vacation and sick time owed to any employee of BIO-key who will work for InterAct starting as of the closing date, which accrued on BIO-key’s June 30, 2009 balance sheet or incurred in the ordinary course of business of the Law Enforcement Division since June 30, 2009 and not discharged as of the closing date; and all liabilities and obligations arising from and after the closing date under the contracts to be purchased by InterAct.

Excluded liabilities.    The liabilities InterAct will not assume include, among others, any liability or obligation for BIO-key’s taxes that arise as a result of the transactions contemplated by the Asset Purchase Agreement; any liability or obligation relating to employee pensions, benefits or compensation arrangements incurred or accrued prior to the closing date; any pre-closing environmental liability; any liability, lien or obligation relating to any excluded asset; any liability or obligation not incurred in the ordinary course of the business of the Law Enforcement Division; BIO-key’s obligation to provide vacation time, sick time, personal days, vacation pay and sick pay to any employee, provided that InterAct will assume and be responsible for any accrued and unused vacation time and sick time owed to the employees of BIO-key who are being transferred to InterAct; any liability resulting from any action, suit, proceeding, order, judgment, decree or investigation of BIO-key or the Law Enforcement Division prior to the closing date; or any liability of BIO-key which may be owed to any agent, broker, finder or investment or commercial banker as a result of the transactions contemplated by the Asset Purchase Agreement.

Consideration to be Received

Consideration to be paid at closing.  As consideration for the Asset Sale, BIO-key will be paid an aggregate of $11,000,000, of which $7,000,000 will be paid in cash at the closing of the proposed transaction, subject to customary adjustments as provided in the Asset Purchase Agreement.  BIO-key will also receive a promissory note in the original principal amount of $4,000,000 issued by InterAct, guaranteed by InterAct911 Corporation and one of its owners SilkRoad Equity, LLC, a private investment firm that owns 48.75% of InterAct911 Corporation’s equity interests on a fully diluted basis (“SilkRoad”), and secured by a pledge of all of the intellectual property assets of the Law Enforcement Division being transferred to InterAct as part of the Asset Sale.  This promissory note is to be paid in three equal installments beginning on the first anniversary of the closing and will bear interest, payable on a quarterly basis, at a rate per annum equal to six percent (6%) compounded annually on the principal sum from time to time outstanding.  The full text of this promissory note is attached to this proxy statement as Annex C and is incorporated by reference into this proxy statement.

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InterAct has agreed that the payments due under the promissory note must be paid immediately in full if any of the following events occur: (i) InterAct is acquired by another party, resulting in a change of control of InterAct; (ii) InterAct completes an initial public offering; (iii) InterAct receives proceeds from an additional round of equity capital that collectively exceeds $20,000,000; (iv) InterAct fails to pay any installment of principal or interest due to BIO-key under the terms of the promissory note within three business days of the date due; (v) InterAct dissolves, liquidates or becomes bankrupt; or (vi) the promissory note or any of the documents contemplated by the such promissory note shall cease it be in full force and effect, is declared to be null and void or such note fails to create a valid and perfected first priority lien in favor of BIO-key in the subject collateral.

Warrant to Purchase Common Stock.  If the Asset Purchase Agreement and the Asset Sale are approved at the special meeting and the Asset Sale is consummated, BIO-key will transfer substantially all of its assets, and certain specified liabilities, related to its Law Enforcement Division to InterAct, and BIO-key will continue to exist as a separate public company.  Additionally, as consideration for and at the closing of the Asset Sale, SilkRoad will be issued a warrant (the “Warrant”) to purchase for cash up to 8,000,000 shares of BIO-key’s common stock, at an exercise price equal to $0.30 per share.  Since InterAct will continue to resell the BIO-key biometric technologies post-closing, the issuance of the Warrant to SilkRoad will further solidify BIO-key’s relationship with InterAct and its affiliates.  The warrant will expire on the fifth anniversary of the closing of the proposed Asset Sale.  The terms of the Warrant may only be changed, waived, discharged or terminated by a signed instrument from the party against which enforcement of such change, waiver, discharge or termination is sought.  The Warrant will expire on the fifth anniversary of the closing date of the Asset Sale.  There are 7,100,000 other warrants currently outstanding.  If the Warrant is exercised in full, the Company expects to receive an aggregate of $2,400,000 in cash proceeds, which are expected to be used for working capital purposes and for general corporate purposes.    The full text of the Warrant is attached to this proxy statement as Annex D and is incorporated by reference into this proxy statement.

None of the proceeds of the Asset Sale will be paid directly to BIO-key’s shareholders.  However, BIO-key intends to a portion of the sale proceeds (i) to pay the remainder of its outstanding liability (equal to $1,082,461 plus accrued and unpaid interest) to Longview Special Finance, Inc. and Longview Fund, L.P., (ii) to pay the outstanding amount due under its unsecured promissory note issued to The Shaar Fund, Ltd. (equal to $1,000,000 plus accrued and unpaid interest), and (iii) to redeem all outstanding shares of its Series B and C Convertible Preferred Stock, portions of which are currently held by The Shaar Fund, Ltd.

Completion of the Asset Sale

The completion of the Asset Sale is subject to all of the conditions contained in the Asset Purchase Agreement, which are described in the section entitled “The Asset Purchase Agreement — Conditions to Obligations to Complete the Asset Sale” beginning on page [        ] of this proxy statement, are satisfied or waived, including approval of the Asset Sale by the stockholders of BIO-key.

Representations and Warranties

The Asset Purchase Agreement contains general representations and warranties made by BIO-key on the one hand and InterAct on the other, regarding aspects of their respective businesses, financial condition and structure, as well as other facts pertinent to the Asset Sale.   

BIO-key made a number of representations and warranties to InterAct in the Asset Purchase Agreement, including representations and warranties relating to the following matters:

·                  corporate organization, qualifications to do business and corporate standing of BIO-key and its subsidiaries;

·                  corporate authorization to enter into and carry out the obligations contained in the Asset Purchase Agreement;

·                  absence of any conflict or violation of the corporate charter and by-laws of BIO-key, any applicable legal requirements or any agreements with third parties, as a result of entering into and carrying out the obligations contained in the Asset Purchase Agreement;

·                  BIO-key’s SEC filings and the financial statements contained in those filings;

·                  capital structure of BIO-key and the absence of pre-emptive rights with respect to BIO-key or any of its subsidiaries;

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·                  absence of liabilities not disclosed or reserved against in BIO-key’s financial statements;

·                  absence of certain changes or events since January 1, 2009;

·                  title to properties;

·                  taxes and tax returns;

·                  material contracts;

·                  intellectual property

·                  litigation;

·                  compliance with regulatory requirements;

·                  employees;

·                  insurance;

·                  affiliate transactions;

·                  compliance with applicable law by BIO-key and its affiliates;

·                  governmental and regulatory approvals required to complete the Asset Sale;

·                  product warranties;

·                  environmental matters;

·                  entitlements to any brokerage or finders’ fees or agents’ commissions or any similar charges in connection with the transactions contemplated by the Asset Purchase Agreement;

·                  accounts receivable;

·                  software and information systems; and

·                  customers and suppliers.

InterAct made a number of representations and warranties to BIO-key in the Asset Purchase Agreement, including representations and warranties relating to the following subject matters:

·                  corporate organization, qualifications to do business and corporate standing;

·                  corporate authorization to enter into and carry out the obligations contained in the Asset Purchase Agreement and the absence of any conflict or violation of the corporate charter or by-laws of InterAct, any applicable legal requirements or any agreements with third parties, as a result of entering into and carrying out the obligations contained in the Asset Purchase Agreement;

·                  financial statements;

·                  litigation;

·                  availability of funds;

·                  entitlements to any brokerage or finders’ fees or agents’ commissions or any similar charges in connection with the

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transactions contemplated by the Asset Purchase Agreement;

·                  no untrue statements of a material fact or omission of a material fact necessary to make the representations and warranties of InterAct not misleading in the light of the circumstances in which they were made; and

·                  InterAct as an informed and sophisticated purchaser experienced in the evaluation and purchase of assets and its acknowledgment that BIO-key made no representation or warranty with respect to any projections, estimates or budgets delivered or made available to InterAct of future revenues, future results of operations or any component thereof, future cash flows or future financial condition relating to the purchased assets or the Law Enforcement Division.

BIO-key’s Conduct of Business Before Closing of the Asset Sale

Under the Asset Purchase Agreement, BIO-key has agreed, and agrees to cause its subsidiaries to agree, until the closing of the Asset Sale, except under certain circumstances or as consented to in writing by InterAct (which consent will not be unreasonably withheld), to conduct its business in the usual, ordinary course of business, to use its reasonable best efforts to keep available the services of key employees and key consultants of BIO-key and its subsidiaries, to preserve the current relationships with customers, suppliers and others as reasonably necessary to preserve substantially intact the Law Enforcement Division.

In addition, BIO-key agreed that, until the closing of the Asset Sale, it will not (and will not permit its subsidiaries to) without the prior written consent of InterAct (which consent will not be unreasonably withheld):

·                  declare, set aside or make any distributions in respect of its capital stock;

·                  enter into any agreement with respect to the voting of capital stock of BIO-key;

·                  increase the compensation, severance benefits or prerequisites payable or to become payable to any employee of BIO-key to be hired by InterAct after the closing of the Asset Sale;

·                  modify, amend or terminate, or waive, release or assign any material rights or claims with respect to any confidentiality or standstill agreement to which BIO-key is a party and which relates to a business combination involving the Law Enforcement Division;

·                  take any action that is intended to avoid the fulfillment of the condition conditions of the Asset Purchase Agreement; or

·                  take any action that is reasonably likely to cause a delay in the convening of the special meeting of stockholders.

BIO-key must also provide InterAct and its officers, employees, accountants, counsel, financial advisors and other representatives reasonable access at all reasonable times on reasonable notice during the period prior to the closing of the Asset Sale to all properties, books, contracts, commitments, personnel and records related to the Law Enforcement Division, provided that such access will not unreasonably interfere with the business or operations of BIO-key.  Moreover, BIO-key and InterAct agreed to use their commercially reasonable efforts to assist and cooperate with the other party to do all things necessary, proper or advisable under applicable law to consummate and make effective the transactions contemplated under the Asset Purchase Agreement, including obtaining approval or waiver from any governmental authority or third party and defending any lawsuits or other legal proceedings that challenge the Asset Purchase Agreement.

Obligation of the BIO-key Board of Directors with Respect to Its Recommendation and Holding a Stockholders’ Meeting

Under the terms of the Asset Purchase Agreement, BIO-key agreed to duly give notice of, convene and hold a special meeting of the stockholders as promptly as practicable after the proxy statement is filed with the SEC.  BIO-key will use commercially reasonable efforts to solicit from its stockholders proxies in favor of the approval of the Asset Sale and will take all other actions necessary or advisable to secure the vote or consent of our stockholders required by applicable law to obtain such approvals.

However, BIO-key may adjourn or postpone the special meeting to the extent necessary pursuant to the terms of the Asset Purchase Agreement to ensure that any necessary supplement or amendment to the proxy statement is provided to its stockholders in advance of a vote on and the approval of the Asset Agreement or, if, as of the time for which such special meeting is originally scheduled, there are insufficient shares of BIO-key common stock represented (either in person or by proxy) to constitute a quorum necessary to conduct business of such special meeting.

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Standstill

Under the terms of the Asset Purchase Agreement and subject to certain exceptions described below, BIO-key agreed that it will not, and that it will not authorize or permit any of its or its subsidiaries’ directors, officers, employees, investment bankers, financial advisors, attorneys, accountants, other representatives retained by it or any of its subsidiaries to, directly or indirectly:

·                  solicit, initiate or encourage, or take any other action to knowingly facilitate, induce or encourage any inquiries with respect to, or the making of any acquisition proposal;

·                  participate in any negotiations or discussions regarding, furnish to any person any information with respect to, or otherwise cooperate in any way with or knowingly facilitate any effort or attempt to make or implement any acquisition proposal;

·                  approve, endorse or recommend any acquisition proposal; or

·                  enter into any letter of intent or similar document or any contract, agreement or commitment (whether binding or not) contemplating or otherwise relating to any acquisition proposal.

BIO-key also agreed to immediately cease, and to cause its officers, directors, employees, investment bankers, financial advisors, attorneys, accountants and other representatives to cease, any and all existing activities, discussions or negotiations with third parties regarding any acquisition proposal and will use its commercially reasonable efforts to enforce, and will not waive any provisions of, any confidentiality or standstill agreement or any similar agreement to which BIO-key is a party relating to an acquisition proposal.

Notwithstanding the foregoing, at any time prior to obtaining the approval of the Asset Sale by BIO-key’s stockholders, in response to an unsolicited written bona fide acquisition proposal by a third party that the BIO-key board of directors reasonably determines in good faith (after consultation with BIO-key’s outside legal advisors) that failure to so respond to such proposal would be inconsistent with its fiduciary duties under applicable law and such proposal constitutes (or is reasonably likely to lead to) a superior proposal, BIO-key may furnish nonpublic information to a person making the acquisition proposal, and enter into discussions with that person regarding the acquisition proposal, provided that:

·                  prior to furnishing any nonpublic information, BIO-key receives from such third party an executed confidentiality agreement containing terms at least as restrictive as the terms contained in the confidentiality agreement previously entered into between BIO-key and InterAct; and

·                  simultaneously with furnishing any nonpublic information to such third party, BIO-key furnishes such nonpublic information to InterAct, to the extent such nonpublic information has not been previously so furnished to InterAct.

The Asset Purchase Agreement defines an acquisition proposal as any offer, inquiry, proposal or indication of interest (whether binding or non-binding) to BIO-key or its stockholders, relating to any of the following transactions: (i) any acquisition or purchase from BIO-key by any person or group of more than a 20% interest in the total outstanding voting securities of BIO-key or any tender offer or exchange offer that if consummated would result in any person or group beneficially owning securities representing 20% or more of the total outstanding voting power of BIO-key; or any merger, consolidation, business combination, share exchange or similar transaction involving BIO-key pursuant to which the stockholders of BIO-key immediately preceding such transaction hold securities representing less than 80% of the total outstanding voting power of the surviving or resulting entity of such transaction; (ii) any sale, lease, exchange, mortgage, transfer, license or disposition of assets representing 20% or more of the aggregate fair market value of the consolidated assets of BIO-key and its subsidiaries taken as a whole; or (iii) any liquidation or dissolution of BIO-key.

Conditions to Obligations to Complete the Asset Sale

The respective obligations of BIO-key and InterAct to complete the Asset Sale are subject to the satisfaction or waiver of each of the following conditions:

·              the Asset Sale must be approved by the affirmative vote of a majority of the holders of BIO-key common stock;