Document:

Form of Stock Option Agreement under the Unitrin, Inc. 2002 Stock Option Plan.

 Exhibit 10.6 
  
 Unitrin, Inc. 2002 Stock Option Plan 
  
 NON-QUALIFIED STOCK OPTION AND SAR AGREEMENT 
  
 This NON-QUALIFIED STOCK OPTION AND SAR AGREEMENT (“Agreement”) is made as of this
         day of                     , 2     (“Grant Date”)
between UNITRIN, INC., a Delaware corporation (the “Company”), and «name» (the “Option Holder”). 
  
 RECITALS 
  
 A. The Board of Directors of the Company has adopted the Unitrin, Inc. 2002 Stock Option Plan, including any and all amendments to date (the
“Plan”). 
  
 B. Pursuant to the Plan, the Plan shall be
administered by a committee appointed by and comprised of members of the Company’s Board of Directors (“Committee”). 
  
 C. The Plan provides for the granting to selected executive and other key employees, and other persons furnishing services to the Company or any
subsidiary or affiliate of the Company, as the Committee may from time to time determine, of options to purchase shares of Common Stock of the Company and tandem stock appreciation rights (“SAR(s)”). 
  
 D. Pursuant to the Plan, the Committee has determined that it is to the
advantage and best interest of the Company and its stockholders to grant a non-qualified stock option (and tandem SAR) to the Option Holder covering «shares» («number») shares of the Company’s Common Stock as an
inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Non-Qualified Stock Option and SAR Agreement between the Company and the Option Holder.

  
 E. Neither the option nor the SAR granted hereby is intended
to qualify as an “incentive stock option” under Section 422A of the Internal Revenue Code of 1986, as amended. 

 NOW, THEREFORE, the parties hereto agree as follows: 
  
 1. Grant. 
  
 (a) The Company grants to the Option Holder the right and option (the
“Option”) to purchase on the terms and conditions hereinafter set forth, all or any part (subject to the limitations of Section 3) of an aggregate of «shares» («number») shares of the Common Stock of the Company at
the purchase price of $             per share. The Option shall be exercisable from time to time in accordance with the provisions of this Agreement during a period expiring on the
tenth anniversary of the Grant Date or such later date as may result from the application of Section 6 (such anniversary or later date is referred to as the “Expiration Date”). The Option is also subject to early termination pursuant to
Section 3(e) and Section 5. 
  
 (b) The Option is coupled with a
SAR that is exercisable to the extent, and only to the extent, that the Option is exercisable under the vesting provisions of Section 2. The term of the SAR shall expire on the Expiration Date and shall be subject to early termination pursuant to
Section 3(e) and Section 5. The SAR shall entitle the Option Holder to surrender the Option (or any portion thereof, subject to Section 3(a)) to the Company unexercised and receive in exchange for the surrender of the Option (or the surrendered
portion thereof) that number of shares of the Company’s common stock having an aggregate value equal to: (A) the excess of the fair market value of one share of such stock (as determined in accordance with Section 4) over the purchase price per
share specified in Section 1(a) above (or, if applicable, such price as adjusted pursuant to Section 9 or Section 14 hereof), multiplied by (B) the number of such shares subject to the Option (or portion thereof) which is so surrendered. 

 
 2. Vesting. The Option Holder may not purchase any shares by
exercise of this Option or the SAR prior to the six-month anniversary of the Grant Date (the “Initial Vesting Date”). The shares subject to this Option and the SAR shall become exercisable in four (4), equal annual installments, the first
of which shall vest on the Initial Vesting Date, and the remainder of which shall vest on the first, second and third anniversaries of the Initial Vesting Date, respectively. Subject to early termination under Section 5 or the terms of the Plan and
no later than the Expiration Date, the Option Holder may purchase all or any part (subject to the limitations of Section 3) of the shares subject to this Option which are currently exercisable, or such lesser number of shares as may be available
through the exercise of the SAR. The total number of shares subject to the Option and the number of shares subject to the Option which are currently exercisable by the Option Holder each shall be reduced by the number of shares previously acquired
by the Option Holder pursuant to this Agreement. 
  

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 3. Manner of Exercise. 
  
 (a) Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company by the Option
Holder or his or her Representative (as such term is defined in the Plan). Such notice shall specify the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased using the
following methods, individually or in combination: (i) by check payable to the order of the Company in an amount equal to the purchase price, (ii) by Constructive or Actual Delivery of Mature Shares (as defined in the Plan) with a fair market value
as of the close of business on the date of exercise equal to or greater than the purchase price, (iii) by electronic transfer of funds to an account of the Company, or (iv) by other means acceptable to the Committee. This Option may not be exercised
for a fraction of a share and no partial exercise of this Option may be for less than fifty (50) shares unless the total number of shares covered by this Option is less than 50 on the date of exercise or unless this Option is scheduled to expire
within six months of the date of exercise. 
  
 (b) Each exercise
of the SAR shall be by means of a written notice of exercise delivered to the Company, specifying whether the Option Holder is surrendering all or a portion of the Option and, if only a portion of the Option is being surrendered, how many shares are
included in such portion. Upon satisfaction of the Option Holder’s obligation to pay the Company the amount of all taxes that the Company is required to withhold in connection with such exercise as specified in Section 3(d) below, the Company
shall issue to the Option Holder a number of shares of the Company’s common stock computed in accordance with Section 1(b) and the Option and the SAR (or the surrendered portions thereof) shall be deemed extinguished. The SAR may only be
settled in shares of the Company’s common stock and not by payment of cash to the Option Holder. Any fractional share that would otherwise result from an exercise of the SAR shall be rounded down to the nearest whole share. 
  
 (c) This Option and SAR may be exercised only by the Option Holder or his or
her Representative, and not otherwise, regardless of any community property interest therein of the spouse of the Option Holder, or such spouse’s successors in interest. If the spouse of the Option Holder shall have acquired a community
property interest in this Option and the SAR, the Option Holder, or the Option Holder’s Representative, may exercise the Option and the SAR on behalf of the spouse of the Option Holder or such spouse’s successors in interest. 

 
 (d) Upon the exercise of this Option or the SAR, the Company shall require
the Option Holder or the Option Holder’s Representative to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such exercise. Subject to the limitations set forth in the next three sentences,
the Option Holder or 
  

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 his/her Representative may elect to satisfy all or any portion of such tax withholding obligations either by: (i) any of
the methods described in Sections 3(a)(i) through 3(a)(iv) above, or (ii) directing the Company to withhold shares that would otherwise have been issued pursuant to the exercise of this Option or SAR. Neither the Option Holder nor his/her
Representative shall have the right to utilize Constructive or Actual Delivery of Mature Shares or to have shares withheld, in either case, in excess of the minimum number required to satisfy applicable tax withholding requirements based on minimum
statutory withholding rates for federal and state tax purposes, including payroll taxes. Shares used in either of the foregoing ways to satisfy tax withholding obligations will be valued at their fair market value on the date of exercise. In the
case of an exercise of the SAR, the Company retains the right to require the Option Holder to pay any and all withholding taxes arising out of such exercise solely in cash. 
  
 (e) Except as provided in Section 14 below with respect to the coupling of a SAR to a Restorative Option, in the event the
Option (or any portion thereof) is exercised, then the SAR (or the corresponding portion) shall terminate. In the event that the SAR (or any portion thereof) is exercised, then the Option (or the corresponding portion) shall likewise terminate.

  
 4. Fair Market Value of Common Stock. The fair
market value of a share of Common Stock shall be determined for purposes of this Agreement by reference to the closing price of a share of Common Stock on the New York Stock Exchange, as reported by The Wall Street Journal for the Grant Date
or date of exercise, as applicable, or if such date is not a business day, for the business day immediately preceding such date, (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect
the then fair market value thereof). 
  
 5. Cessation of
Services. The provisions of Sections 11(a), 11(b), 11(c) and 11(d) of the Plan are hereby incorporated into and made a part of this Agreement. 
  
 6. Extension of Expiration in Certain Cases. From time to time, the Company may declare “blackout” periods with respect to
designated employees of the Company and/or its subsidiaries or affiliates during which such employees are prohibited from engaging in certain transactions in Company securities. In the event that the scheduled Expiration Date of this Option and SAR
shall fall within a blackout period that has been declared by the Company and that applies to the Option Holder, then the Expiration Date shall automatically, and without further notice to Option Holder, be extended until such time as fifteen (15)
consecutive business days have elapsed after the scheduled Expiration Date without interruption by any blackout period that applied to the Option Holder. 
  
 7. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option or
SAR shall be 
  

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 issued and delivered unless and until there shall have been full compliance with all applicable requirements of the
Securities Act of 1933, as amended (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of the New York Stock Exchange or such other exchange(s) or markets on which shares of the same class are then
listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the
part of the Company is made. 
  
 8. No Assignment.
This Option and SAR and all rights and privileges granted hereby (including the right of exercise) shall not be transferred, assigned, pledged or hypothecated in any way, whether by operation of the law or otherwise, except by will or the laws of
descent and distribution. Without limiting the generality of the preceding sentence, no rights or privileges granted hereby may be assigned or otherwise transferred to the spouse or former spouse of the Option Holder pursuant to any divorce
proceedings, settlement or judgment. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or SAR or any other rights or privileges granted hereby contrary to the provisions hereof, this Option and SAR and all
other rights and privileges contained herein shall immediately become null and void and of no further force or effect. 
  
 9. Certain Adjustments The provisions of Sections 13(a), 13(b) and 13(c) of the Plan relating to certain adjustments in the case of stock
splits, reorganizations, equity restructurings, change of control events and similar matters described therein are hereby incorporated in and made a part of this Agreement. 
  
 Any such adjustments shall be made by the Committee, whose determination as to what adjustments shall be made, and the
extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 
  
 10. Participation by Option Holder in Other Company Plans. Nothing herein contained shall affect the right of the Option Holder to
participate in and receive benefits under and in accordance with the then current provisions of any retirement plan or employee welfare benefit plan or program of the Company or of any subsidiary or affiliate of the Company, subject in each case, to
the terms and conditions of any such plan or program. 
  
 11.
No Rights as a Stockholder Until Issuance of Shares. Neither the Option Holder nor his/her Representative shall be entitled to any of the rights or privileges of a stockholder of the Company in respect of any shares issuable upon any
exercise of this Option or SAR unless and until such shares shall have been issued and delivered to: (i) Option Holder in the form of certificates, (ii) a brokerage or other account for the benefit of Option Holder either in certificate form or via
“DWAC” or similar electronic means, or (iii) a book entry or direct registration account in the name of Option Holder. 
  

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 12. Not an Employment or Service Contract. Nothing herein contained shall be construed as
an agreement by the Company or any of its subsidiaries or affiliates, expressed or implied, to employ Option Holder or contract for Option Holder’s services, to restrict the right of the Company or any of its subsidiaries or affiliates to
discharge Option Holder or cease contracting for Option Holder’s services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between the Option
Holder and the Company or any of its subsidiaries or affiliates. 
  
 13. Agreement Subject to Stock Option Plan. The Option and SAR hereby granted are subject to, and the Company and the Option Holder agree to be bound by, all of the terms and conditions of the Plan, as the same may be amended
from time to time hereafter in accordance with the terms thereof, but no such amendment shall adversely affect the Option Holder’s rights under this Agreement without the prior written consent of the Option Holder. To the extent that the terms
or conditions of this Agreement conflict with the terms or conditions of the Plan, the Plan shall govern. 
  
 14. Restorative Stock Options. To the extent the Option Holder may hereafter become entitled to a Restorative Option (as defined in the
Plan) pursuant to the exercise of this Option, the undersigned Option Holder and his or her spouse agree to be bound by all the terms and conditions of this Agreement and the Plan with respect to such Restorative Option. Each Restorative Option that
may result from the exercise of this Option shall be deemed to be coupled with a SAR identical in terms with the original SAR provided for in Section 1(b) of this Agreement, except that (i) the exercise price per share of such SAR shall be equal to
the fair market value of one share of the Company’s common stock on the date of the exercise giving rise to such Restorative Option, and (ii) such SAR shall fully vest six months after its inception. No Restorative Option shall be granted with
respect to any Constructive or Actual Delivery of Mature Shares (as defined in the Plan), or any shares withheld, in either case to pay any applicable withholding taxes that arise out of an exercise of the SAR. 
  
 15. Execution. This Option and SAR have been granted, executed
and delivered as of the day and year first above written at Chicago, Illinois, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Illinois without application of its conflicts of laws
principles. 
  
 16. Miscellaneous. This Agreement,
together with the Plan, is the entire agreement of the parties with respect to the Option and SAR granted hereby and may not be amended except in a writing signed by both Unitrin, Inc. and the Option Holder or his/her Representative. 
  

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	UNITRIN, INC.	 	OPTION HOLDER
			
	 By:
	 	  

	 	  

	 	 	 «Authorized Officer»
	 	 «name»

	  
 By his or her signature below, the
spouse of the Option Holder agrees to be bound by all of the terms and conditions of the foregoing Non-Qualified Stock Option and SAR Agreement.

	 	 	 	 	  

	 	 	 	 	  

	 	 	 	 	 Print Name

  

 7EX-4.1

Form of Warrants

THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE THEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY OTHER
APPLICABLE SECURITIES LAW AND, ACCORDINGLY, THE SECURITIES REPRESENTED BY THIS WARRANT AND THE
COMMON STOCK ISSUABLE THEREBY MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER,
THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.

WARRANT

to Purchase Common Stock of

TERAFORCE TECHNOLOGY CORPORATION

Expiring on October 30, 2010

This Common Stock Purchase Warrant (the “Warrant”) certifies that for value received,
[INVESTOR] (the “Holder”) is entitled to subscribe for and purchase from the Company (as
hereinafter defined), in whole or in part, [   ] shares of duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock (as hereinafter defined) at the Exercise Price
(as hereinafter defined), subject, however, to the provisions and upon the terms and conditions
hereinafter set forth. This Warrant and all rights hereunder shall expire at 5:00 p.m., Dallas,
Texas time, on October 30, 2010.

As used herein, the following terms shall have the meanings set forth below:

"Company” shall mean TeraForce Technology Corporation, a Delaware corporation, and
shall also include any successor thereto with respect to the obligations hereunder, by merger,
consolidation or otherwise.

"Common Stock” shall mean and include the Company’s Common Stock, par value $0.01 per
share, authorized on the date of the original issue of this Warrant.

"Exercise Price” shall mean $0.20 per share of Common Stock payable upon exercise of
the Warrant, as adjusted pursuant to the provisions hereof.

“Guarantees” shall have the meaning as defined in that Reimbursement Agreement between
the Holder and the Company of even date hereof.

"Market Price” for any day, when used with reference to Common Stock, shall mean the
price of said Common Stock determined as follows: (x) the last reported sale price for the Common
Stock on such day on the principal securities exchange on which the Common Stock is listed or
admitted to trading or if no such sale takes place on such date, the average of the closing bid and
asked prices thereof as officially reported, or, if not so listed or admitted to trading on any
securities exchange, the last sale price for the Common Stock on the National Association of
Securities Dealers National Market on such date, or, if there shall have been no trading on such
date or if the Common Stock shall not be listed on such system, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any NASD member firm selected from time
to time by the Company for such purpose, in each such case, unless otherwise provided herein,
averaged over a period of ten (10) consecutive Trading Days prior to the date as of which the
determination is to be made; or (y) if the Common Stock shall not be listed or admitted to trading
as provided in clause (x) above, the fair market value of the Common Stock as determined in good
faith by the Board of Directors of the Company.

"Person” means any individual, corporation, partnership, joint venture, association,
joint stock company, trust, unincorporated organization or government or any agency or political
subdivision thereof.

"Securities Act” means the Securities Act of 1933, as amended from time to time.

"Trading Days” shall mean any days during the course of which the principal securities
exchange on which the Common Stock is listed or admitted to trading is open for the exchange of
securities.

"Warrant Shares” shall mean the shares of Common Stock purchased or purchasable by the
Holder hereof upon the exercise of the Warrant.

1

ARTICLE I

EXERCISE OF WARRANT

1.1 Method of Exercise. The Warrant represented hereby may be exercised by the Holder
hereof, in whole or in part, at any time and from time to time on or after the date hereof until
5:00 p.m., Dallas, Texas time, on October 30, 2010. To exercise the Warrant, the Holder hereof
shall deliver to the Company (i) a written notice in the form of the Subscription Notice attached
as an exhibit hereto, stating therein the election of such Holder to exercise the Warrant in the
manner provided in the Subscription Notice; and (ii) payment in full of the Exercise Price (A) in
cash or by bank check for all Warrant Shares purchased hereunder or (B) if permitted pursuant to
Section 1.6 below, by notifying the Company that this warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 1.6) or (C) a combination of (A) and (B) above; and (iii)
this Warrant. The Warrant shall be deemed to be exercised on the date of receipt by the Company of
the Subscription Notice, accompanied by payment for the Warrant Shares and surrender of this
Warrant, as aforesaid, and such date is referred to herein as the “Exercise Date”. Upon such
exercise, the Company shall, as promptly as practicable and in any event within ten (10) business
days, issue and deliver to such Holder a certificate or certificates for the full number of the
Warrant Shares purchased by such Holder hereunder, and shall, unless the Warrant has expired or has
been redeemed, deliver to the Holder hereof a new Warrant representing the portion, if any, that
shall not have been exercised, in all other respects identical to this Warrant. As permitted by
applicable law, the Person in whose name the certificates for Common Stock are to be issued shall
be deemed to have become a holder of record of such Common Stock on the Exercise Date and shall be
entitled to all of the benefits of such holder on the Exercise Date, including without limitation
the right to receive dividends and other distributions for which the record date falls on or after
the Exercise Date and to exercise voting rights.

1.2 Reservation of Shares. The Company shall reserve at all times so long as the
Warrant remains outstanding, free from preemptive rights, out of its treasury Common Stock or its
authorized but unissued shares of Common Stock, or both, solely for the purpose of effecting the
exercise of the Warrant, a sufficient number of shares of Common Stock to provide for the exercise
of the Warrant.

1.3 Valid Issuance. All shares of Common Stock that may be issued upon exercise of
the Warrants will, upon issuance by the Company, be duly and validly issued, fully paid and
non-assessable and free from all taxes, liens and charges with respect to the issuance thereof.

1.4 No Fractional Shares. The Company shall not be required to issue fractional
shares of Common Stock on the exercise of this Warrant. If any fraction of a share of Common Stock
would be issuable on the exercise of this Warrant, the Company shall pay an amount in cash
calculated by it to be equal to the Market Price of one share of Common Stock at the time of such
exercise multiplied by such fraction computed to the nearest whole cent.

1.5 Reimbursement Agreement; Registration Rights Agreement. This Warrant is issued in
connection with that certain Reimbursement Agreement dated October 22, 2004 between the Company and
the Holder (the “Reimbursement Agreement”). Except as otherwise set forth in that certain
Registration Rights Agreement dated as of October 22, 2004 between the Company and the Holder (the
“Registration Rights Agreement”), the Warrant and the Warrant Shares are not registered
pursuant to the Securities Act and may not be transferred absent an effective registration
statement or an exemption from such registration.

1.6 Cashless Exercise. If (i) the Company and the Holder mutually elect; or (ii) the
Warrant Shares to be issued are not registered for resale to the extent required by the
Registration Rights Agreement, then, notwithstanding anything to the contrary, the Holder may
exercise, at its election, in its sole discretion, this Warrant in whole or in part and, in lieu of
making the cash payment otherwise contemplated to be made to the Company upon exercise of this
Warrant, elect instead to receive the Warrant Shares through a “cashless” or
“net-issue” exercise of the Warrant (“Cashless Exercise”). The Holder
shall exchange the Warrant subject to a Cashless Exercise for that number of Warrant Shares
determined by multiplying the number of Warrant Shares issuable hereunder by a fraction, the
numerator of which shall be the difference between (x) the Market Price and (y) the Exercise Price
for each such Warrant Share, and the denominator of which shall be the Market Price; the
Subscription Notice shall set forth the calculation upon which the Cashless Exercise is based.

ARTICLE II

TRANSFER

2.1 Ownership of Warrant. The Company may deem and treat the Person in whose name the
Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or
writing hereon made by anyone other than the Company) for all purposes and shall not be affected by
any notice to the contrary unless agreed to in writing by the Company.

2.2 Restrictions on Transfer of Warrants. The Holder of the Warrant agrees that the
Warrant is not transferrable without the prior written consent of the Company and any such transfer
without such consent shall be void and without effect, unless such transfer occurs by operation of
law. Subject to the restrictions on transfer of the Warrant in this Section 2.2, the Company, from
time to time, shall register the transfer of the Warrant in such books upon surrender of this
Warrant at the Company’s principal office, properly endorsed or accompanied by appropriate
instruments of transfer and written instructions for transfer satisfactory to the Company. Upon
any such transfer and upon payment by the Holder or its transferee of any applicable transfer
taxes, a new Warrant shall be issued to the transferee and the transferor (as their respective
interests may appear) and the surrendered Warrant shall be canceled by the Company. The Holder
shall pay all taxes and all other expenses and charges payable in connection with the transfer of
the Warrant pursuant to this Section 2.2.

2.3 Compliance with Securities Laws. Subject to the terms of the Registration Rights
Agreement and notwithstanding any other provisions contained in this Warrant, the Holder hereof
understands and agrees that the following restrictions and limitations shall be applicable to all
Warrant Shares and to all resales or other transfers thereof pursuant to the Securities Act, and
that as a condition to the exercise of such warrant that the following are and will be true and
correct:

(A) The Holder hereof agrees that the Warrant Shares shall not be sold or otherwise
transferred unless the Warrant Shares are registered under the Securities Act and applicable
state securities or blue sky laws or are exempt therefrom.

(B) A legend in substantially the following form will be placed on the certificate(s)
evidencing the Warrant Shares:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR ANY OTHER APPLICABLE SECURITIES LAW AND, ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE RESOLD, PLEDGED, OR
OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER, OR UPON RECEIPT OF AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY PURSUANT TO A TRANSACTION EXEMPT FROM REGISTRATION
UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER APPLICABLE
SECURITIES LAWS.”

(C) Stop transfer instructions will be imposed with respect to the Warrant Shares so as
to restrict resale or other transfer thereof, subject to this Section 2.3.

(D) The Holder is an “accredited investor” within the meaning of Rule 501
of Regulation D as promulgated under the Securities Act, and will be so as a condition of
purchasing any of the Warrant Shares. The Holder will acquire the Warrant, and if
exercised, any Warrant Shares for its own account for investment purposes and not with a
view towards distribution. The Holder must bear the economic risk of the investment for an
indefinite period of time because the Warrant and Warrant Shares have not been registered
under the Securities Act and therefore cannot be sold unless they are subsequently
registered under the Securities Act or an exemption from such registration is available. The
Holder has received and carefully reviewed copies of all documents filed by the Company with
the Securities and Exchange Commission as of the date hereof, and will do so before each
exercise of the Warrant. No representations or warranties have been made to the Holder by
the Company, the officers or directors of the Company, or any agent, employee or affiliate
of any of them. The Holder is aware that the Warrant and any purchase of the Warrant Shares
involves a high degree of risk and that it may sustain, and has the financial ability to
sustain, the loss of its entire investment. The Holder has had the opportunity to ask
questions of, and receive answers, satisfactory to it from the Company’s management
regarding the Company. The Holder understands that no Federal or State governmental
authority has made any finding or determination relating to the fairness of an investment in
the Warrant or Warrant Shares and that no Federal or State governmental authority has
recommended or endorsed, or will recommend or endorse, the investment herein. The Holder,
in making the decision to acquire the Warrant, and if it is exercised, the purchase of the
Warrant Shares subscribed for, has relied upon independent investigations made by it and has
not relied on any information or representations made by third parties. The Holder has
significant assets, and upon consummation of the purchase of the Warrant Shares, will
continue to have significant assets exclusive of the Warrant Shares. The Holder understands
that the Warrant, and if exercised, the Warrant Shares are being offered and sold to it in
reliance on specific provisions of Federal and State securities laws and that the Company is
relying upon the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Holder set forth herein in order to determine the
applicability of such provisions. The Holder, in making the decision to purchase the
Warrant, and if exercised, the Warrant Shares subscribed for, has relied upon independent
investigations made by it and has not relied on any information or representations made by
third parties.

ARTICLE III

ANTI-DILUTION

3.1 Anti-Dilution Provisions. If the outstanding shares of the Company’s Common
Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be
paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision
or at the record date of such dividend shall simultaneously with the effectiveness of such
subdivision or immediately after the record date of such dividend be proportionately reduced. If
outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall, simultaneously with the effectiveness
of such combination, be proportionately increased. When any adjustment is required to be made in
the Exercise Price, the number of Warrant Shares purchasable upon the exercise of this Warrant
shall be changed to the number determined by dividing (i) an amount equal to the number of shares
issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the
Exercise Price in effect immediately in effect prior to such adjustment, by (ii) the Exercise Price
in effect immediately after such adjustment.

3.2 Reduction of Exercise Price. Should the Company, at any time while the
Guarantees are outstanding, issue Common Stock at a price per share less than $0.18, or issue
warrants or convertible securities that provide for an exercise or conversion price of less than
$0.18 per share, then the Exercise Price shall be reduced to such lesser amount.

3.3 Reorganizations and Asset Sales. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation, merger or share
exchange of the Company with another Person, or the sale, transfer or other disposition of all or
substantially all of its assets to another Person shall be effected in such a way that a holder of
Common Stock of the Company shall be entitled to receive capital stock, securities or assets with
respect to or in exchange for their shares, then as part of any such reorganization,
reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made
so that the Holder of this Warrant shall have the right thereafter to receive upon exercise hereof
the kind and amount of shares of stock or other securities or property which such Holder would have
been entitled to receive if, immediately prior to any such reorganization, reclassification,
consolidation, merger or sale, as the case may be, such Holder had held the number of shares of
Common Stock which were the purchasable upon the exercise of this Warrant. In any such case,
appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the
Company) shall be made in the application of the provisions set forth herein with respect to the
rights and interests thereafter of the Holder of this Warrant, such that the provisions set forth
herein (including provisions with respect to adjustment of the Exercise Price) shall thereafter be
applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other
securities or property thereafter deliverable upon the exercise of this Warrant.

3.4 Notice of Adjustment. Whenever the Exercise Price or the number of Warrant Shares
issuable upon the exercise of the Warrant shall be adjusted as herein provided, or the rights of
the Holder hereof shall change by reason of other events specified herein, the Company shall
compute the adjusted Exercise Price and the adjusted number of Warrant Shares in accordance with
the provisions hereof and shall prepare a notice setting forth the adjusted Exercise Price and the
adjusted number of Warrant Shares issuable upon the exercise of the Warrant or specifying the other
shares of stock, securities or assets receivable as a result of such change in rights, and showing
in reasonable detail the facts and calculations upon which such adjustments or other changes are
based. The Company shall cause to be mailed to the Holder hereof, no later than 10 days after any
such adjustment herein provided, copies of such notice stating that the Exercise Price and the
number of Warrant Shares purchasable upon exercise of the Warrant have been adjusted and setting
forth the adjusted Exercise Price and the adjusted number of Warrant Shares purchasable upon the
exercise of the Warrant.

	 	 	 
	 
	 	 
	
 
	 	ARTICLE IV

MISCELLANEOUS

4.1 Entire Agreement. This Warrant, together with the Securities Purchase Agreement
and the Registration Rights Agreement, contain the entire agreement between the Holder hereof and
the Company with respect to the Warrant Shares purchasable upon exercise hereof and the related
transactions and supersedes all prior arrangements or understandings with respect thereto.

4.2 Governing Law; Venue. This warrant shall be governed by and construed in
accordance with the laws of the State of Texas. Venue for any dispute arising under this Warrant
shall lie in the state or federal courts of Dallas County, Texas.

4.3 Waiver and Amendment. Any term or provision of this Warrant may be waived at any
time by the party which is entitled to the benefits thereof and any term or provision of this
Warrant may be amended or supplemented at any time by agreement of the Holder hereof and the
Company, except that any waiver of any term or condition, or any amendment or supplementation, of
this Warrant shall be in writing. A waiver of any breach or failure to enforce any of the terms or
conditions of this Warrant shall not in any way effect, limit or waive a party’s rights hereunder
at any time to enforce strict compliance thereafter with every term or condition of this Warrant.

4.4 Illegality. In the event that any one or more of the provisions contained in this
Warrant shall be determined to be invalid, illegal or unenforceable in any respect for any reason,
the validity, legality and enforceability of any such provision in any other respect and the
remaining provisions of this Warrant shall not, at the election of the party for whom the benefit
of the provision exists, be in any way impaired.

4.5 Copy of Warrant. A copy of this Warrant shall be filed among the records of the
Company.

4.6 Notice. Any notice or other document required or permitted to be given or
delivered to the Holder or the Company hereof shall be in writing and will deemed to have been
delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided a confirmation of transmission is mechanically generated and kept on file by the sending
party); or (iii) one (1) day after deposit with a nationally recognized overnight delivery service,
in each case properly addressed to the party to receive the same. The addresses and facsimile
numbers for such communications shall be: any notice or other document required or permitted to be
given or delivered to the Company shall be sent to the offices of the Company at 1240 East Campbell
Road, Richardson, Texas 75081, Attn: Chief Financial Officer, Telecopy No. (469) 330-4972 or such
other address as shall have been furnished in writing by the Company to the Holder of this Warrant.
Any notice sent or required to be sent hereunder to the Holder shall be sent to the address of the
Holder as contained in the corporate records of the Company or such other address as shall have
been furnished in writing by the Holder to the Company.

4.7 Limitation of Liability; Not Stockholders. No provision of this Warrant shall be
construed as conferring upon the Holder hereof the right to vote, consent, receive dividends or
receive notices (other than as herein expressly provided) in respect of meetings of stockholders
for the election of directors of the Company or any other matter whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the Holder hereof to
purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder hereof, shall give rise to any liability of such Holder for the purchase price of any shares
of Common Stock or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.

4.8 Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of this Warrant, and in
the case of any such loss, theft or destruction upon delivery of a bond of indemnity or such other
security in such form and amount as shall be reasonably satisfactory to the Company, or in the
event of such mutilation upon surrender and cancellation of this Warrant, the Company will make and
deliver a new Warrant of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant.
Any Warrant issued under the provisions of this Section 4.8 in lieu of any Warrant alleged to be
lost, destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company. This Warrant shall be promptly canceled by the
Company upon the surrender hereof in connection with any exchange or replacement. The Company
shall pay all taxes (other than securities transfer taxes or income taxes) and all other expenses
and charges payable in connection with the preparation, execution and delivery of Warrants pursuant
to this Section 4.8.

4.9 Registration Rights. The Warrant Shares shall be entitled to such registration
rights under the Securities Act and under applicable state securities laws as are specified in the
Registration Rights Agreement.

4.10 Headings. The Article and Section and other headings herein are for convenience
only and are not a part of this Warrant and shall not affect the interpretation thereof.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name.

Dated: October 22, 2004

TERAFORCE TECHNOLOGY CORPORATION

By: 

	 	 	 	Name:
Robert P. Capps

	 	 	 	Title: Executive Vice President and Chief
Financial Officer

2

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