2. How does CULPRIT-Scope, LLC calculate depreciation deductions related to the equipment contributed by Clark? Describe how these deductions are allocated between the two LLC members under the "traditional method." Show your calculations.

Re: Formation and Initial Operations of CULPRIT-Scope, LLC

Dear David:

As we discussed, the following information summarizes the financial activities of CULPRIT-Scope, LLC since its inception on January 1 of this year.

This has been an amazing and trying year! Erik and I have both worked long hours at our regular jobs. It has been difficult to find time to work on the Scope, so we hired people to d a lot of the work for us. Still, we each managed to spend just a bit less than 500 hours working with the LLC. Overall, it took an incredible amount of dedication, and it looks as if our efforts are really paying off.

Ownership and Formation

Erik Crawford and I each own 50% interest in CULPRIT-Scope, LLC. We each contributed property with a total net value of $250,000.

Last year, I started working on preliminary research on my own (through a single- member LLC), and I bought equipment for $200,000. I claimed depreciation and related amounts of $114,290 (this includes a $100,000 "off-the-top" deduction and MACRS calculated using a 7-year life). I contributed that equipment to the LLC. We valued it at

$120,000. I still owed $70,000 on it, and the bank agreed to allow the LLC to assume that debt. The net value of the equipment at the contribution date was $50,000. I also contributed $200,000 cash. [Note to participants: Assume the equipment debt is nonrecourse to the LLC.]

Erik contributed land that he had inherited several years ago. The real estate market was a bit depressed at the beginning of the year, so the land was appraised at only at $250,000 in January. Erik's basis in the land was $100,000.

Early Activities - February 1 to July 31.

For the first few months, we worked to develop the "Scope" - and to try to sell Erik's land to pay our expenses! You told us how to classify certain types of expenses, and we used those categories in determining our totals. We spent $120,000 trying to figure out some of the technology angles, and we spent about $40,000 getting ready to sell the product. [As you instructed us, we included our $20,000 of legal fees related to the patent in these "technology-related" costs.]

We spent another $40,000 that didn't completely fall into either of the two categories you gave us, so we weren't sure how to categorize those amounts. For one thing, our lab tech also worked as our receptionist, so we didn't know how to treat her salary. We had to pay the utility bills and rent on the space we were using. Most of the space was for the lab, but part of it was for storage of office supplies and our display materials for the trade shows we attended later in the year. It seems as if those amounts could be classified either way - as technology-related expenses or as part of gearing up for sales.

Trade Show and Initial Sales - August 1 to December 31.

In early August, everything happened at once! Our patent applications were accepted just in time for the International Association of Crime Scene Investigators Conference in Orlando. We were invited to speak about our work on the CULPRIT-Scope. A few days later, we were contacted by a friend of one of the conference organizers.

We needed cash, so we didn't take too long with our negotiations! The bottom line is that we signed a contract that week with Crime Defense Systems, Inc. (CDS). We still own the patent, but CDS will manufacture the Scope and pay us a royalty based on sales of the product. They pre-sold a number of the units in just a few weeks. We expect to receive our first check for about $60,000 sometime in late December.

Land Sale - October 15.

We needed funds to continue our research, so we continued to try to sell the land Erik contributed. The market rebounded a great deal over the summer, so we were finally successful. We sold it at a great price - the LLC received $280,000 for the sale.

On December 1, we used $200,000 of the money from the land sale to buy some equipment that we needed to continue our research. We expect our expenses to be about

$30,000 through the end of the year. With the remaining cash from the land sale and with part of the proceeds from our patent royalty check, we will be able to pay off the equipment debt and start off next year with a bit of cash in the bank.

Summary of Cash Receipts and Disbursements.

This chart summarizes the cash flow that we expect to have during this entire initial year.

Receipts

Jan. 1

Cash contribution (Clark)

$ 200,000

Oct. 15

Land sale (Erik)

280,000

Dec. 15 (est)

Sales revenue

60,000

Total cash receipts $ 540,000

Disbursements

Payments before August 1:

Pa

Total disbursements $ 500,000

Ending cash $ 40,000

Please let me know if you have any additional questions or comments. Sincerely,

Clark

Lt. Clark Crane President

CULPRIT Scope, LLC

Costs related to researching and designing the Scopes

$ 120,000

Costs related to getting ready to sell the Scopes

40,000

Other expenses we didn't know how to categorize

(before opening)

40,000

yments after August 1:

Equipment purchases (7-year MACRS property) 200,000

Costs after opening

30,000

Debt repayment (before end of year)

70,000

Lt. Clark Crane Det. Erik Crawford

Genetic Intelligence, Inc. 165 Washington Ave

Miami Beach, FL 33139

September 20, 2006

Det. Emily Stewart 625 Alton Road

Miami Beach, FL 33142

Re: Genetic Intelligence, Inc.

Dear Detective Stewart:

You have indicated that, with adequate research facilities and staff assistance, you believe you could develop a system to capture DNA that is presently trapped in evidence gathered before DNA testing was available. Specifically, police departments across the country have cabinets full of fingerprint cards that are 10-to-40 years old. The oils and ink in the fingerprint itself store DNA evidence, but that evidence has been sealed into the card by plastic tape used to preserve the fingerprint.

Proposed laboratory. You have provided an equipment list and specifications for operating such a laboratory. You quoted a price of $10 million to form the lab, plus an additional $2 million to operate it for its first two years. Its goal: to develop, during that initial two-year period, a DNA Capture system (DNA-Cap) that can penetrate non-porous surfaces to capture DNA stored beneath it, without damaging the non-porous surface or any element of the tested item.

Funding. As you know, we recently sold, for $12 million, the patent for the breakthrough technology used in the CULPRIT-Scope. The proceeds from that sale (plus revenues from police departments submitting evidence to the lab for testing) will be adequate to form this facility, which you will oversee for its first two years.

Proposed ownership. Our proposal is that we (Clark and Erik) will each contribute $5 million in forming an entity to operate the lab. You will be granted a 10% ownership interest in that company (valued at $1 million), subject to restrictions. Two conditions are attached to this ownership interest: 1) You may not transfer that interest for the first five years of the entity's existence, and 2) You must oversee the lab in exchange for a market- rate salary for at least the two years required for product development and testing. At your election, we will also either 1) pay you $500,000 cash (not restricted) upon signing this agreement, or 2) you will receive an additional 5% ownership interest (valued at

$500,000) subject to the same conditions that are attached to the initial 10% interest.

Benefits and risks of this ownership opportunity. If you accept this proposal, the benefit to you is that, when these restrictions expire, you will own a 10% (or 15%) interest in a valuable business, and that you will not have been required to fund your investment with cash. If you succeed in developing the DNA-Cap system, you will be the 10 or 15% owner of an entity with an extremely high market value. Our appraiser estimates (based on comparable valuations for high-tech start-up companies) that after two years, GI could be valued at up to $50 million; and after five years, the company could be valued at up to $100 million.

No pressure, but if you do not succeed, we will all be the owners of a DNA laboratory with outdated equipment valued at a fraction of that amount (probably worth as little as

$2 million).

Corporate status. We anticipate that Genetic Intelligence, Inc. will be formed on October 1 of the current tax year. For your information, we anticipate that the company may incur losses for tax purposes in its initial two or three years of operations as a result of all the equipment purchases the entity must make. However, we are confident we can meet the cash requirements of the lab during this initial period.

Please let us know your thoughts regarding this arrangement. Sincerely,

Clark

Lt. Clark Crane, President

Erik

Det. Erik Crawford, Vice President